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The Seizure and Detention of Aireraft by Canadian Airports and the Convention on International Interests in Mobile Equipment
A Critical Analysis ofNon-consensual Rights Under the Unidroit Regime
by:
Dimitri Maniatis
A thesis submitted to the Faculty ofGraduate Studies and Research in partial fulfillment of the requirements ofthe degree of Master of Laws
May, 2001
Institute of Air and Space Law McGi11 University Montreal, Canada .~ © Dimitri Maniatis 2001 1+1 ~nationaJe Acquisitions and AcquiIitions et Bibliographie Services services bibliographiques 315 WIIIingtDn Street 315, rue WeIingIan oeta.-ON K1A 0N4 01.-ON K1A 0N4 CMIIdI c..a
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Canadl • ACKNOWLEDGEMENTS The preparation and presentation of a Master's thesis in law is a challenging task, this one perhaps more so as a result only of the author's professional schedule and other commitments. Without the understanding of the partners and associates of my firm, it would have been impossible. l therefore express my gratitude to the members of Langlois Gaudreau for their patience and assistance while 1 was working on the preparation of this manuscript.
As the topic of this thesis dissertation grew out of work conducted by the author on behalf of Aéroports de Montreal, portions of this study were prepared with the research assistance of members of the firme Ta the extent that this research was relied on herein, the author expresses his gratitude to them. Editorial assistance was provided by Me Jonathan R. Levinson and Me Guy P. Martel, to whom the author is grateful. For her assistance in the formatting and presentation of the text, Ms. Marcia Diaz also deserves thanks.
The unwavering support and assistance of Prafessor Dr. Michael Milde, Professor at the Faculty of Law, McGill University, is also gratefully acknowledged. Despite his busy schedule, Dr. Milde graciously agreed ta supervise the author in the preparation of this texte The author shaH forever be indebted to him for his support throughout and is praud ta remain his student in life and in the study of law.
Finally, the author wishes ta express his eternal gratitude to his parents, Nicholas and Effie Maniatis, without whom the author may not have been in a position to complete the requirements of this LL.M. degree, let alane embark upon the challenging and rewarding career that • he hase This dissertation is lovingly dedicated to them both. - i - • AB8TRACT Canadian airport authorities benefit from the right to seize and detain aircraft where airport charges remain unpaid. By objective measures, this right constitutes a preferred non-consensual right or interest that takes priority under Canadian law over all competing rights and interests in the aireraft subjeet ta seizure and detention, including, for example, the interests of an owner, lessor or secured creditor. In this manner, airpart authorities may recover outstanding user fees from bath the airlines themselves and from the aircraft owners or lessors.
The Unidroit Convention attempts ta harmonise the law applicable to aircraft finance transactions. As such, it targets private law rights. However, its breadth and scope touch upon the statutory rights of third parties with non-consensual interests in aireraft, including those of airport authorities to seize and detain aircraft.
The interplay between the Unidroit regime and the seizure and detention rights of Canada's airport is the [oeus of this academic discourse. It demonstrates that even though this right, recourse and
remedy lS of fundamental importance ta Canada's National Airports System and its transportation infrastructure generally, the Unidroit Convention could, if implemented as drafted, effectively compromise the ability of Canadian airports to seize and detain aircraft.
• - u- • RÉSUMÉ Les administrations aéroportuaires canadiennes bénéficient d'un droit de saisie et de rétention des aéronefs lorsque les frais d'aéroport sont impayés. D'une façon objective, un tel droit constitue un droit ou un intérêt préférentiel non consensuel ayant priorité en droit canadien sur les droits et intérêts quant aux autres créanciers relativement aux aéronefs faisant l'objet d'une saisie et d'une rétention, incluant par exemple les intérêts d'un propriétaire, locateur ou créancier garanti. Ainsi, les autorités aéroportuaires peuvent recouvrer, à la fois, des frais d'usager impayés par les lignes aériennes et par les propriétaires ou locateurs d'aéronefs.
La Convention d'Unidroit tente d'harmoniser le droit applicable aux transactions financières visant des aéronefs. En ce sens, cette convention relève du droit privée. Toutefois, de par sa nature et son étendue, la convention affecte les droits statutaires de tiers ayant des intérêts non consensuels relativement aux aéronefs, incluant le droit de saisie et de rétention des administrations aéroportuaires.
L'interaction entre le régime proposé par la Convention d'Unidroit et le droit de saisie et de rétention des aéroports canadiens fait l'objet de la présente étude. Celle-ci démontre que même si le droit de saisie et de rétention des aéroports est d'une importance fondamentale pour le système aéroportuaire canadien, la Convention d'Unidroit pourrait, advenant son intégration en droit canadien telle que rédigée, compromettre la capacité des administrations aéroportuaires canadiennes de se prévaloir de leur droit de saisie et de rétention. • - iü - • TABLE OF CONTENTS Acknowledgements i
Ahstract ii
Résumé iii
1. Introduction 1
PART ONE:
THE SEIZURE AND DETENTION OF A1RCRAFT BY CANADIAN A1RPORTS: A NON-CON8ENSUAL RlORT OR INTEREST
II. A Brief Overview of Canadian Airports 8
A. The National Airports Policy 8
B. Regulatory Oversight of Airports 12
II. Origins and Rationale of the Detention Rights of Canadian Airports 13
A. Rationale and Public Policy Considerations 13
B. Origins of the Detention Rights of Canadian Airports 15
1. 1985 Amendments to the Aeronautics Act 15
2. Amendments to the Airport Transfer Act. 16
C. Value and Effectiveness 18
III. The Seizure and Detention of Aircraft 19
A. Seizure and Detention by Transport Canada 19
B. Seizure and Detentian by Canadian Airport Authorities 20
1. Seizure of Aircraft 22 • 1.1 Leave to Seize and Detain Aircraft. 22 - iv - -v-
1.1.1 Procedure to Obtain Leave 22
1.1.2 When Leave to Seize and • Detain Will be Granted 27 a. Identity of the Seizing Party 28
b. Operation of Airport by Seizing Party 29
c. Nature of the Debt 29
d. Identity of the Seized Aircraft 32
1. Aircraft "Owned or Operated" by the Person Liable to Pay the Airport Charges 32
11. Are Seizures Limited to the Specifie Aircraft for Which the Unpaid Airport Charges Were Incurred? 36
111. Number of Aircraft Which may be Seized 40
e. Location of the Seized Aircraft 40
f. Aircraft Exempt from Seizure 41
1. Aircraft Exempt from Seizure by Regulation 41
11. Aircraft Exempt from Seizure Under a Writ of Execution 42
1.2 Seizure of Aireraft Once Leave Has Been obtained 44
2. Detention of Aircraft 45
2.1 Release on Payment 46
2.2 Release on the Posting of a Bond or Other • Securit:)' ...... •...... 47 - VI -
2.2.1 Forro of the Bond or Other Seeurity 48 • 2.2.2 Amount of Seeurity 50 2.3 Release by Court Order 53
3. Other Remedies 54
3.1 Sale of Aireraft by Seizing Authority 54
3.2 Drawing on Security 55
V. Competing Rights in Aircraft: A Practical Problem 56
PART TWO:
THE MOBILE EQUIPMENT CONVENTION AND A1RCRAFT PROTOCOL
VI. The Unidroit Initiative 66
A. Historical Background 67
B. Principle F'eatures 69
VII. Mobile Equipment Convention/Aircraft Protocol. 72
A. Chapter 1 of the Convention - Interpretation and Application Law 72
1. Preamble 73
2. Article 5(2) of the Convention - General Principles Underlying the Unidroit Regime 75
B. Chapter X of the Convention - Non-consensual Rights and Interests 77
1. Article 38 of the Convention - Registerable Non- consensual Rights and Interests 78
2. Article 39 of the Convention - Preferred Non- consensual Rights and Interests 80
c. Article l(s) of the Convention - Definition of "Non- • consensual Right or Interest" 84 - vü-
o. Chapter III of the Convention & Articles IX, X and XIII of the Protocol- Default Remedies 86 • 1. Articles 7 and 8 of the Convention and Article IX of the Protocol - Remedies of the Chargee 87
2. Article 9 of the - Remedies of the Conditional Seller or Lessor 89
3. Article 12 of the Convention and Article X of the Protocol- Interim Relief. 89
E. Article 28 of the Convention - Priority of Competing Interests 90
F. Article 29 of the Convention and Article XI of the Aircraft Protocol - Effects of Insolvency and Remedies 94
G. Chapter XII of the Convention & Chapter IV of the Aircraft Protocol - Jurisdiction 95
H. Article 55 of the Convention - Transitional Provisions 97
VIII. Concluding Remarks 99
Bibliography 101
• • 1. Introduction he credit exposure of Canada's major airports to the airlines that use their facilities and services is enormous. During the T course of the weekly operations of most airlines, significant airport charges are engendered. With a short thirty day billing cycle, airports often extend credit ta airlines in the order of many millions of dollars. As the billing cycle lengthens, the credit and associated risk to airports increase proportionally.
Over the years, given the public interest function and non-profit status of airports, it was felt that this risk was unacceptable, particularly in light of the fact that many airlines have no permanent assets or place of business in Canada. To compound the problem, the most comman self-help collection remedy, that is ta refrain from providing additional gaods or services to debtors until they acquit their arrears, is not available to airports. They are in effect required by law ta continue providing services and facilities to defaulting airlines, thereby exacerbating any outstanding arrears and their corresponding credit risk.
For these reasons, Canadian airports are now empowered by statute to seize and detain aircraft for unpaid airport charges. l By certain measures, this right constitutes a preferred non-consensual right or security interest that takes prionty under Canadian law over aIl competing rights and interests in the aircraft subject to seizure and detention, including, for example, the interests of the aircraft owner or
l As regards the seizure and detention of aircraft by Canada's principal airports, see Airport Transfer (Miscellaneous Matters) Act, R.S.C. 1992, c. A-ICA, s. 9 [hereinafter Airport Transfer Act or Act]. For airports operated by Transport Canada, see Aeronautics • Act, S.C., c. A-2, s. 4.5 [hereinafter Aeronautics Act). - 1 - -2-
secured creditor.2 In this manner, Canadian airports may recover • outstanding airport charges owed to them by airlines from bath the airlines themselves and, in the case of the insolvency or bankruptcy thereof, from the aireraft owners or secured creditors, who have no ehoice but to acquit these arrears in exehange for the release from detention of their aireraft. Clearly, this is an exceptional remedy designed for extraordinary circumstances.
In practice, however, the rights and interests of airports in the aircraft of their debtor airlines sometime come iota conflict with the conventional security or ownership rights of third party aireraft financiers.3 Upon the material default of an airline ta discharge its debts, its creditors often promptly seek remedy in various forms, including suit against the carrier. Where available, however, in rem or other action directly against aircraft is the preferred remedial vehicle as the underlying value of the asset serves to guarantee effective recovery, particularly in the event of the insolvency or bankruptcy of the carrier. Where an airline defaults on its aircraft lease payments, for example, lessors often immediately proeeed to revendicate the leased equipment with a view to re-marketing same. Confliets sometimes arise between creditors with rights in their debtor's aircraft, however, where more than one seeks remedy against the aireraft itself. In sueh cases, the
2 The economics of the air transport industry are such that aircraft operated by airlines are rarely in fact owned by them. Instead, carriers finance their Geet from cash rich companies such as financial institutions, which oCten retain title to the aireraft, recognising that ownership is the best security device. Title is reseIVed under conditionals sales agreements and leases. Under security agreements, ownership transfers to the airline, subject to the movable hypothec granted in favour of the secured creditor. For background information on aircraft financing, see D. Bunker, The Law of Aerospace Finance in Canada (Montreal: Institute of Air and Space Law, 1988); B.J.H. Crans, "Selected Pitfalls and Booby Traps in Aircraft Finance" (1992) XVIl:2 Air & Sp. L. 43. 3 Airports provide services and facilities to air carriers or others, not ta aircraft. As such, an aircraft financier is properly qualified as a third party to the contract between the airport and airline, despite the fact that the financier may have security • interests in the airline's aircraft. - 3 -
competing priorities must be established and ranked, a task complicated • by the trans-jurisdictional nature of aviation and the conflicts of laws it generates.
As a direct result of this conflict of laws and the corresponding risk and financing cost it generates, as weil as increasing capital requirements of industry participants, the question of security interests in aircraft has recently come to the forefront of debate and diplomatic priorities. Following ten years of negotiations, the international community, lead by the International Air Transport Association (IATA), aircraft manufacturers and financiers, is expected to adopt this year a Convention on International Interests in Mobile Equipment4 and Protocol on Matters Specifie to Aireraft Equipment.5 Characterised as "one of the most signifieant international conventions ever to be made in the field of private trans-national commercial law,"6 the Unidroit Convention provides a framework for the creation and effects of an international seeurity interest in high-value, uniquely identifiable mobile equipment. The draft Aircraft Protocol adapts the meehanisms set out in the
.. The most recent draft of the Convention was approved by the 31 st session of the Legal Committee of the International Civil Aviation Organisation (ICAO) held at Montreal from August 28, 2000, to September 8, 2000. For the text of the Convention, see Text of the Draft Conuention on Intemational Interests in Mobile Equipment, ICAO Doc. 9765-LCj 191, att. D. part Il [hereinafter Unidroit Convention or Mobile Equipment Convention]. The text of the Convention may also be found at Canada, Fifth Consultation Package to the AttentIon of Interested Canadian authorities, Industries and Practitioners on a Draft ConventIon on Intemational Interests in Mobile Equipment and a Draft Protocol on Matters SpeCIfie to Alreraft Equipment (Ottawa: Department of Justice, 2001) at Tab 9 [hereinafter Fifth ConsultatIon Package]. 5 The most recent draft of the Protocol was also approved by the 31 st session of the Legal Committee of ICAO. For the text of the Protocol, see Text of the Draft Protocol to the Convention on InternatIonal Interesls in Mobile Equipment on Matlers Specifie to Aircraft Equipment, ICAO Doc. 9765-LCj 191, att. E, part II [hereinafter Aircraft Protocol or Protocoij. The text of the Protocol may also be round at Fifth Consultation Package, ibid. at Tab 10. 6 R. Goode, "Transcending the Boundaries of Earth and Space: The Preliminary Draft Unidroit Convention on International Interests in Mobile Equipment" (1998) • Uniform L. R. 52 at 52. -4-
Convention to aircrait equipment, ineluding airframes and engines.7 Combined, they codify a legal framework providing transaetional parties • with greater flexibility, enhaneed fmancing options and reduced risk and costs.
Ta do sa, the Airerait Equipment Convention attempts ta harmonise the law applicable to aircraft finance transactions. As such, it targets private law rights. However, its breadth and scope touch upon the statutoty rights of third parties with non-consensual interests in aircraft, including the right of Canadian airport authorities to seize and detain aircraft.
This interplay between the regime saon to be established by the Unidroit Convention and the seizure and detention rights of Canada's airports is the focus of this academic discourse. In content, it will demonstrate that even though this right, recourse and remedy is of fundamental importance to Canada's National Airports System (NAS) and its transportation infrastructure generally, the Unidroit Convention could, if implemented as drafted, effectively compromise the seizure and detention rights conferred upon Canadian airports. The degree of any such impact depends in part on the manner in which the Convention is implemented into the Canadian legal landscape. Irrespective of domestic implementation, however, adopted positions and approaches at the international Level, as weIl as textual arnbiguities of the Aircraft Equipment Convention, may give rise to unintended outcomes prejudicial to the rights of Canadian airports. The result of international
ï A consolidated text of the Convention and Aircraft Protocol was recently prepared. although it is not considered to be an authentic text with an)' legal authority. For the text thereof. see Tex! of the Draft Convention on International lnterests in Mobile Equipment (consolidated text), (CAO Doc. 9765-LC/191. att. F, part Il. In this dissertation. the framework agreement shaH be referred to as the "Unidroit Convention." "Mobile Equipment Convention" or "Convention." The protocol concerned with aircraft • equipment shaH be referred to as the "Aircraft Protocol" or "Protocol." Combined. these - 5-
deliberations so far therefore appears to be a draft instrument that does • net adequately refleet the sometimes divergent interests between transactional parties in aviation fmanee and certain preferred creditors with non-consensual security rights in aïrcraft.
At frrst glance, the impact of the Unidroit Convention on the seizure and detention rights of Canada's airport is not readily apparent. The Convention does contain two provisions specifically treating non consensual rights.8 Nevertheless, ta properly assess this impact, the whole framework treaty and protocol structure must be thoroughly examined against the backdrop of the seizure and detention rights of Canadian airports. This study is therefore divided into two principal parts. At the outset, the right to seize and detain aireraft is examined in sorne detail with a view to determining, inter alia, its purpose, nature, scope and extent. Part One therefore sets the stage for the discussion by constructing the contextual foundation upon which the rest of the study \vill build. In this regard, Chapter II provides an overview of Canadian airports, including an examination of the National Airports Policy (NAP) and relevant statutory instruments. The erigins, rationale and effectiveness of the detentian rights of Canadian airports are treated at Chapter III. The remainder this Part provides a detailed analysis of the seizure and detention rights of Canadian airports with a view ta detennining, among other things, their opposability as against third parties and priority among aften competing interests in aircraft. For this purpose, reference will need ta be made to provincial law, in which case the civillaw of Quebec is considered.
two instruments shaH be referred to as the "Aireraft Equipment Convention" or "Convention/Aircraft Protocol.'· oSee Mobile Equipment Convention, supra note 4, arts. 38 & 39. For a detailed •
Against this backdrop, Part Two of the study treats specifically the • Unidroit Convention as applied to aviation through the Aircraft Protoeal and the impact thereof on the seizure and detention rights of Canadian airports. The aim of this Part is not to provide an exhaustive analysis of the Unidroit Initiative, a task clearly beyond the scope of this study, but rather ta focus on one aspect thereof: the treatment of non-eonsensual rights or interests in aireraft, a matter heretofore not the subject of significant eommentary. In this manner, the impact of this new international legal instrument on the statutory right to seize and detain aircraft may be brought to light. At the same time, where such impact is discerned, improvements to the draft instruments are proposed.
• - 7-
PART ONE:
• THE SEIZURE AND DETENTION OF AIRCRAFT SY CANADIAN AIRPORTS: A NON-CONSEN'SUAL SECURITY IN'TEREST
Canadian airports henefit from rights in and recourses against aircraft for the recovery of outstanding airport user fees engendered by airlines. Yet, the ability to seize and detain aircraft for unpaid airport charges is a little known recourse. As such, it has generated scant substantive judicial or doctrinal commentaIy. This lack of authority on the question is not surprising when consideration is given to the following factors: (1) The remedy is relatively new, having been added to the Aeronautics Act in 1985. (2) It is rarely invoked, the threat of a seizure and detention often sufficing to achieve the desired result.9 (3) Although of significant importance of the aviation community, it has little impact outside thereof and as such has generated little interest among the bar.
Despite the paucity of authority specifically treating this statutory remedy now codified in both the Aeronautics Act and the Airport Transfer Act, its underlying ratianale is clear: ta ensure airport user fees are paid. Ta achieve this result, Parliament has provided airports with a mechanism to perfect an enforceable security interest in assets of value
without the necessity of conventional agreement. 10
9 See O. Gray ··Canada" in G. McBain, ed., Aircraft Liens and Detention Rights (London: Sweet & Maxwell, 1999) at Canada-33. 10 For this reason, the rights conferred upon airports are referred ta as "noo • cansensual rights:· - 8-
Il. A Brief Overview of Canadian Airports
• There are approximately seven hundred and twenty six certified airports in Canada, ranging in size from Lester B. Pearson International Airport in Toronto, Canada's largest, ta grass strips operated for recreational use only. Over ninety percent of all passenger and cargo traffic cornes though twenty-six of these airports, which, today, fonn the backbone of Canada's airport infrastructure.ll
A. The National Airports Polie)'
The legal status of Canada's principal airports has evolved over the years, from governmental undertakings ta commercial not for profit concerns operating in the public interest. This evolution was sparked by a desire to apply business discipline ta a sector that had become a drain on public resources. It was felt that Canada's transportation system risked becoming a liability rather that an asset to Canadian businesses and consumers given that federaI funding for transportation totalled approximately $2.3 billion, an important portion of which was used to finance the operation of airports and air navigation facilities. 12
OriginaIly, there existed no statutory, regulatory, or poliey framework clearly defining the role of the government in the operation of airports. This lacuna gave rise to ad hoc decision-making which led the federaI govemment to assume increased responsibility for airports. It aIso forced the govemment into a multitude of different roles in the airport sector, including that of operator, financier, landlord, regulator
11 See Gray, supra note 9 at Canada-3D. 12 See Canada, New Directions for Transportation in Canada, online: Transport Canada
and advisar, the whole under the authority and respansibility of • Transport Canada.13 Over time, regianal imbalances developed with respect to funding and facilities. The numerical majority of Canada's airports consumed the vast majority of budgeted federal resources, despite the fact that they handled less than twenty percent of the traffic. The cross-subsidisation required to maintain this imbalance was perceived ta be an unfair burden on both taxpayers and users alike. 14
The February, 1994, federal budget therefore mandated Transport Canada to examine the possible commercialisation of certain of its principal activities, including the provision of air navigation services and airport facilities, the \vhole with a view to improving efficiency and assuring long-term viabiIity.ls In the context of this review, the then Minister of Transport, Doug Young, announced the adoption of the National Airports Policy, providing for a new framework for federa! involvement in Canadian airports and consequently the ne\v regtme within which airports no\\' aperate. It was billed as the first comprehensive framework that clearly set out the government of Canada's raIe with respect to airports. According ta the then Ministry of Transport, the Policy was designed to enable the federal government ta structure an air transportation system that supports and promotes Canada's competitiveness and meet~ the needs of Canadian taxpayers, carriers and shippers, not to mention those businesses involved directly or indirectly in the aviation industry.16
13 See Canada. The Nallonal Airports Policy, online: Transport Canada
The National Airports Policy distinguishes between airports along the lines of their relative importance to Canada's national transportation • infrastructure and regulates them accordingly. Currently, twenty-six airports fonn part of the National Airports System, each of which maintains annual passenger levels of at least two hundred thousand and is considered essential to Canada's air transportation system. These are Canada's busiest airports, representing approximately ninety-four percent of all scheduled passenger and cargo traffic and the points of origin and destination for almost all international and interprovincial air
service in Canada. 17 Among the largest airports of the National Airports System are those of Toronto, Air Canada's eastern hub, Vancouver and Montreal, aIl of which are integral components of Canada's National Airport System and its transportation infrastructure generally.
Under the National Airports Poliey, the federaI government retained ownership of the twenty-six airports fonning the NAS in sueh a manner as to guarantee the integrity and long term viability of the system. Nevertheless, operational control of these airports has been transferred ta newly constituted Canadian Airport Authorities (CAAs) under the terms of long term leases. CAAs are designated as such by Order in
Council issued under the Airport Transfer Act. 18
Canadian Airport Authorities are non-profit corporations incorporated under applicable corporate legislation and run by boards of directors composed of local community representatives, among others. lg
17 See Canadian Airports Council, History, online: Canadian Airports Council
Board members are appointed by different levels of government and other • organisations such as boards of trade and labour organisations. The federaI govemment may aIso appoint up ta three members, which cannot be elected poüticians or government employees.2o
Established in the early 1990s to manage the public airport network, airport authorities are tasked with providing their airside and ground-side users with safe, efficient and affordable airport facilities and services. They are responsible for all aspects of the operation of airports, including infrastructure development. Indeed, they play an important role in furthering many of the objectives of Canada's transportation policy articulated in the Canada Transportation Act, including, in particular, doing their part to fashion "a safe, economic, efficient and adequate network of viable and effective transportation services accessible to persans with disabilities and that makes the best use of all
available modes of transportation at the lowest total cost."21 Their role is to manage safe, commercially oriented and cost-effective airports which meet the needs of the users and communities they serve.
Airports other than those forming part of the National Airports System faU into one of the following categories: (1) regional or local airports; (2) small airports; (3) remote airports; and (4) arctic airports. Regional/local airports are those that serve scheduled passenger traffïc but handle fewer than 200,000 passengers per year. The remaining categories cover airports that are either mainly used for recreational flying, that constitute the only reliable year-round transportation link to isolated communities, or are situated in the arctic regions. AU of these airports have been or will be divested by Transport Canada ta local
Corporations Act for the purpose of leasing, operating, managing and developing Montreal's airport network. See Canada Corporations Act, R.S. 1970, c. C·32. 20 See National Airports Policy, supra note 13. 21 Canada Transportation Act, s.e. 1996, c. 10, s. 5 [hereinafter Canada • Transportation Act]. - 12-
interests, whether public or private. The rationale for such an approach is that locally-owned and operated airports are able to function in a more • commercial and cost-effective manner and are more responsive ta local needs.22
B. Regulatory Overaight ofAirports
Under the National Airports Policy, the Government of Canada maintains its regulatory and oversight responsibility for all of Canada's airports, but transfers operational responsibility to local airport authorities who run them in accordance with commercial principles. In the case of airports forming part of the National Airports System, the federal government's role has shifted from that of owner/ operator to ownerjlandlord. Ownership and control of smaller regional and other airports was transferred over time to local interests. As such, the majority of Canada's airports are owned and operated by local authorities, even though Transport Canada is responsible for all aspects of aviation safety.
Despite this commercialisation, the operation of aerodromes and airports is subject ta severe regulatory scrutiny, principally in accordance with Part III of the Canadian Aviation Regulations (CARs) promulgated under the Aeronautics Act, which specifically provides that U[t]he Governor in Council may make regulations respecting aeronautics and, without restricting the generality of the foregoing, may make regulations respecting: [..., (e) activities at aerodromes and the location, inspection, certification, registration, licensing and operation of aerodromes."23 Under the CARs, aerodromes and airports used for non military activities must be registered with Transport Canada. Once
22 See National Airports Policy, supra note 13. • 23 See Aeronautics Act, supra note 1, s. 4.9: - 13-
registered, extensive safety standards and requirements and imposed • thereon. III. Origins, Rationale and Effectiveness of the Detention Rights of CanadiaD Airports A. Rationale and Public PoUcy Considerations
Today, airports finance their operations largely by way of fees and charges imposed on users, including landing fees and terminal charges, the whole in conformity with applicable law and the National Airports Policy of the Government of Canada. Under the Aeronautics Act, the Minister is empowered ta impose airport charges for the use of airport services and facilities operated by Transport Canada.24 These charges vary [rom airport to airport, but may include landing charges, terminal fees, loading bridge charges, aireraft parking fees and charges for emergency response services. Canadian Airport Authorities are similarly empo\vered ta impose charges for the use of their facilities and services
in accordance with the tenns of their leases with Transport Canada.25
User fees serve, at 1east in theory, only to defray the costs of providing services and facilities. They are therefore imposed on a cost recovery basis only. Given that airport authorities are not for profit concems, they are prevented from earning profit on their airport operations. In such an environment, if airport user fees remain unpaid and uncollected, the resu1ting budgetary 10ss will need to be recuperated from other airport users in subsequent years.26
.24 See ibid., s. 4.4(2). olS See Greater Toronto Airports Authority v. Air Canada (2000), 2000 CarswellOnt 610, 130 O.A.C. 81 (Ont. C.A.) . 26 For a good exposition of the imposition of fees by airport authorities in Canada and the issues related thereto, see Greater Toronto Airports Authority v. Air • Canada (1999), 89 A.C.W.S. (3d) 647 (Ont. S.C.). - 14-
The credit exposure of Canada's major airports to the airlines that • use their facilities and services is enormous. During the course of the weekly operations of most airlines, significant airport charges are engendered. With a short thirty day billing cycle, airports often extend credit to airlines in the arder of many millions of dollars. As the billing cycle lengthens, the credit and associated risk to airports increase proportionally.
By virtue of their constituting documents and applicable lawand contract, airport authorities must generally offer their facilities and services to airlines on a non-discriminatory basis and, as such, may nat refuse to provide airport facilities or services to particular airlines due to a perceived credit risk. In fact, access to runways and take-off and Ianding slots is controlled by Nav Canada, Canada's third party air navigation services provider, not by airports themselves. Thus, the most common self-help collection remedy, that is ta refrain from providing additional goods or services to debtors until they acquit their arrears, is not available ta airports as airports required by law to continue providing services and facilities ta defaulting airlines, thereby exacerbating any outstanding arrears and their corresponding credit risk.
The existing system therefore exposes Canadian airports ta commercial risk which they did not voluntarily assume, aver which they have no control and for \vhich they earn no return. Over the years, given the public interest function and non-profit status of airports, it was feit that this risk was unbearable, particuiarly in light of the fact that many airlines have no permanent assets or place of business in Canada. • - 15-
B. OrigiDs ofthe Detention Ri,hu ofCamadian Airports • 1. 1985 Amenclments to the Aeronautics Act For the foregoing reasons, Parliament amended the Aeronautics Act in 1985 with a view to strengthening the collection mechanisms available ta airports. Four principal amendments were introduced: First, outstanding and overdue aceounts were to bear ïnterest.27 Seeondly, if carriers did not acquit their aeeounts when due, Transport Canada could demand that a bond or other fonn of seeurity be deposited with it to guarantee the payment of future airport eharges.28 Thirdly, joint and several liability was imposed on the registered owner and operator of the aircraft engendering the airport user fees. 29 Finally, amendments were introduced authorising the seizure and detention of aireraft for unpaid air navigation and airport charges.3o These arnendments to the Aeronautics Act remain in force to this day, and apply ta airports that continue to be operated by Transport Canada.
The Minister of Transport eonfirmed that the rationale underlying
these amendmentsJ including the right to seize and detain aireraft, was to ensure that overdue and outstanding aceounts were in fact paid. He noted with reason that in 1985 arrears for airport charges often totalled at any one time over $10 million and that airports were experieneing signifieant diffieulties in collecting these arrears. In the words of Don Mazankowski, Minister of Transport at the time:
En ce qui concerne les paiements, le texte comporte des modifications visant à améliorer leur perception. Elles prévoient des intérêts sur les comptes en retard et le pouvoir d'éxiger une caution ou une lettre de crédit garantissant le paiement dans le cas où il y aurait déjà eu précédemment retard ou absence de paiement. Cette mesure inclut des
27 See Aeronautics Ace, supra note l, s. 4.4(3) & 4.4(7). 28 See ibid., s. 4.4(6). 29 See ibid., s. 4.4(5). • JO See ibid., s. 4.5. - 16-
pratiques de bon aloi. Elle prévoit aussi la possibilité d'obtenir une ordonnance du tribunal autorisant le gouvernement à saisir un aéronef tant que les paiements en suspens n'ont pas été effectués. Rest • manifeste que dans le passé, à de nombreuses reprises, le ministère des Transports n'a pas eu les moyens de coercition nécessaires pour faire effectuer des paiements qui auraient dû l'ëtre depuis longtemps.JI
Again during the parliamentaty debates on the proposed amendments, the Minister explained as follows:
Nous allons resserrer les mécanismes de perception. Il y a parfois jusqu'au 10 millions de dollars d'arriérés à récupérer. Les aéroports ne se préoccupent guère de percevoir le coût des services à ceux qui utilisent leurs installations, car aucune disposition ne prévoit des intérêts et ils auraient bien du mal à se faire payer. Ce projet de loi va évidemment mettre de l'ordre dans tout cela. Nous sommes vraisemblablement tous d'accord pour que chacun paie son écot. En rendant le système de perception plus efficace, il est fort probable que nous allégerons le fardeau de ceux qui paient. J2
2. Amendments to the Airport Transfer Act
With the adoption and implementation of the National Airports Policy and the commercialisation of Canada's principal airports, consequential legislative changes were required to ensure that newly created Canadian Airport Authorities of the National Airports System could continue to seize and detain aircraft for unpaid airport user fees. As discussed above, under the Aeronautics Act prior ta the adoption of the National Airports Policy, the Minister of Transport operated airports, imposed charges for the use thereof, and as such was empowered ta seize and detain aircraft in collection of such charges. With the transfer of operational control over NAS airports to designated airport authorities, however, the imposition and collection of user fees became their responsibility, as opposed to that of Transport Canada. Given that the po\ver to seize and detain \\."as available only to the Minister at that time,
31 House ofCommons Debates (15 April 1985) at 3730 (D. Mazankowski). • 3.2 Ibid. at 3837. - 17-
amendments to the law were required to similarly empower CAAs to seize • and detain aircraft. Rather than amend the Aeronautics Act, however, changes ta the Airport Transfer Act were made in 1992. Although enacted earlier that year,33 the Airport Transfer Act did not originally contain the language required to empower airport authorities to seize and detain aïrcraft. It would appear from the Parliamentary debates surrounding the adoption of the Act to Amend the Airport Transfer Act34 that the matter was simply overlooked. In reply to a question pased by a member of the opposition as ta why these provisions were not contained in the original Act, a representative of Transport Canada replied as follows: "We did nat know at the time the first bill was introduced. Aiter we did sorne work with lawyers on the other side we discovered that it would be prudent to put it in."35 Such a surprising omission serves to temper the Supreme Court's warning to lower courts that "les moyens disponibles pour rédiger et promulger les lois sont tels qu'une cour doit être réticente à presumer l'oubli ou des intentions inarticulées."36
In amending the Airport Transfer Act, it was the clear intention of Parliament ta transfer ta CAAs the entirety of what under the Aeronautics Act are the Minister's rights of seizure and detention. This intention is evidenced by the Proceedings of the Standing Senate Committee on Transport and Communications held at the time. According thereto:
Clauses 9 and 10 [of the Airport Transfer Act] are mainly a consequential change ta give designated LAAs [Local Airport Authorities] substantially the same powers that subsection 4(5) and 4(6) of the Aeronautics Act give
J3 The Airpart Transfer Act entered into force on March 19, 1992. 34 An Act ta Amend the Airport Transfer (Miscellaneous Matters) Act, S.C. 1992, c. 42 (entered into force on June 23, 1992). 35 Senate of Canada, Standing Senate Committee on Transport and Communications, Debates (15 June 1992) at 23:41 [hereinafter Airport Transfer Act Debates}. • 36 Morguard Praperties Ltd. [1983J 2 S.C.R. 493 at 509. - 18-
to the Minister ofTransport in connection with the seizure and detention of aireraft for non payment by airlines of landing fees and general • terminal fees and so on.37 c. Value IUld EfI'ectiveness
Although not frequently invoked, the ability to seize and detain aircraft is a formidable and essential tool for Canada's airports to recover outstanding airport user fees. In fact, this recourse has proven effective in cases where their principal debtors have fùed for bankruptcy relief, as aircraft owners may chose to acquit the debts of their aircraft lessees in exchange for the release of their aircraft.38
Since the right to seize and detain can be put into effect with relative ease and expediency, subject ta court approval, it serves as an important deterrent for airlines which might otherwise be tempted to abuse the non-local and trans-jurisdictional nature of their operations to the detriment of their creditor airports. The very existence of the right to seize and detain has ensured that, in practice, it has only rarely been exercised, and it is precisely therein that its value as an effective deterrent must be recognised. There have only been a few reported cases in Canada where an airport authority has seized and detained aircraft for non-payment of airport fees. On several occasions, it has sufficed to effectuate brief detentions in order to achieve the desired result.39
RecentlYJ courts have recognised the importance of section 9 of the Act by assimilating the right to seize and detain to the very ability of an airpart ta collect fees. In Greater Toronto Airports Authority v. Air Canada, Justice Cameron clearly recognises that:
37 Airport Transfer Act Debates, supra note 35 at 23:41. 38 In the matter of Inter Canadian, the leading case treating the seizure and detention rights of Canadian airports. at least one airerait seized and detained by the various CAAs was released on payment. For a detailed discussion of this case, see Section V below. • 39 See Gray, supra note 9 at Canada-33. - 19-
The Airport Transfer (Miscellaneous Matters) Act, s. 9(1), authorises a designated airport authority to collect the fees and charges set by it. ~o • The effectiveness of this recourse benefits both CAAs and airlines. It has allowed airports to avoid the burden of taking out various forros of credit insurance,41 thereby serving to lower industry transaction eosts. Moreover, airports do not at present require bonds or other forros of security to be lodged by air carners.42
IV. The Seizure and Detention oC Airer.Ct
Under existing legislation, aireraft may be seized and detained by the Minister of Transport for charges ineurred at airports operated by Transport Canada. For charges incurred at NAS airports, Canadian Airport Authorities may seize and detain aireraft.
A. Seizure and Detention by Transport Canada
The Aeronautics Act provides that the Minister of Transport may abtain a court arder, issued on such terms as the court deems neeessary, authorising the Minister to seize and detain the aireraft owned or operated by the persan Hable ta pat the charges.43 Such order may be obtained ex parte, that is without impleading the debtor airline in the seizure petition, when the Minister has reason ta believe that the persan is about to leave Canada or take from Canada any aircraft owned or operated by the person.44 In addition, the Minister may seize aireraft regardless of whether a judgment has been obtained against his debtor
40 Greater Toronto Airports Authority v. Air Canada, supra note 26 at 10. 41 See N. Hughes, "Eurocontrol and Airport Liens and sorne other Rights of Detention/Forfeiture of Aircraft" (1992) XVII:3 Air & Sp. L. 137 at 138. 42 Ibid. 43 See Aeronautics Act, supra note l, s. 4.5(1). • 44 See ibid., s. 4.5(2). - 20-
for the outstanding amount and regardless of whether such recovery • proceedings have even been instituted.45 The Aeronautics Act makes no mention on the right ta sell the airerait seized in aceordanee with its tenns.46 Nevertheless, it does specifically provide that the Minister is not required ta release an aireraft it has seized until such time as the amount in respect of whieh the seizure was made is paid, or until sueh time as a bond or other seeurity in fonn satisfactory to the Minister for the amount in respect of which the airerait was seized is deposited with him.47
Certain aircrait are exempt from seizure. Section 4.6 of the Aeronautics Act provides that the Govemor in Couneil may exempt any aircraft from seizure and detention. More importantly in the context of the every day operation of airports is the proscription against seizure and detention of aircraft that wauld be exempt from seizure under a writ of execution issued under provinciallaw.48
B. Seizure and Detention by Canaclian Airport Authorities
Canadian Airport Authorities benefit from the same right to seize and detain aircraft in accordance with aimast identical statutory
language eodified at the Airport Transfer Act.49 In relevant part, the Act reads as follows:
45 See ibid., s. 4.5(11. 46 For a discussion of the right to sell aircraft seized by CAAs under the Airport Transfer Act, the provisions of which on the seizure and detention of aircraft are almost identical to those under the Aeronautics Act, see Section IV-B-3 below. Such discussion reveals that despite the absence of specifie language authorising the sale of aircraft, they may indeed be sold in certain cases, with court authorisation. 47 See Aeronautics Act, supra note l, art. 4.5(3) & (4). 48 See ibid., art. 4.6. 49 Despite the similarities between the seizure and detention provision of the Aeronautics Act and the Airport Transfer Act, it should be noted that the Minister benefits from greater statutory protection than CAAs. For example, whereas the • Aeronautics Act provides for the joint and severa! liability of the registered owner and - 21 -
9. (1) Where the amount of any landing fees, general terminal fees or other charges related to the use of an airport, and interest thereon, set by a designated airport authority in respect ofan airport operated by the • authority has not been paid, the authority May, in addition to any other remedy available for the collection of the amount and whether or not a judgment for the collection of the amount has been obtained, on application ta the superior court of the province in which any aircraft owned or operated by the persan liable ta pay the amount is situated, obtain an order of the court, issued on such terms as the court eonsiders neeessary, authorising the authority to seize and detain aireraft.
(2) Where the amount of any fees, charges and interest referred to in subseetion (1) has not been paid and the designated airport authority has reason ta believe that the person liable ta pay the amount is about to leave Canada or take from Canada any aircrait owned or operated by the person, the authority may, in addition ta any ather remedy available for the collection of the amount and whether or not a judgment for the collection of the amaunt has been obtained, on ex parte application ta the superior court of the province in which any aircraft owned or operated by the person is situated, obtain an arder of the court, issued on such terms as the court considers necessary, authorising the authority to seize and detain aircraft.50
In light of the similar statutory language, the remainder of this study speeifically considers only the seizure and detention rights conferred upon CAAs, the whole with a vie\v to bringing to light their nature, scope, opposability as against third parties and priarity. Nevertheless, the analysis undertaken hereunder is for the most part equally applicable to the Minister ofTransport's right ta seize and detain under the Aeronautics ACt.51
The Airport Transfer Act codifies a statutory right, reeourse and remedyavailable to designated airport authorities in Canada. The following paragraphs show that these rights and interests in aircraft include, without limitation: (1) the right ta seize aireraft for unpaid airport charges; (2) the
operator of the aireraft, the Airport Transfer Act does not. Liability for unpaid charges incurred at NAS airports (i.e., thase alrports operated by CAAs) is therefore limited to the person who incurred the charges. ln addition, CAAs may not require that a security deposit be deposited with them for payment of charges incurred in the future. For the relevant statutory provisions of the Aeronautics Act, see Section IV-A above. 50 Airport Transfer Act, supra note 1, s. 9(1) & (2) . 51 The focus on the seizure and detention Iights of CAAs is aIso justified by the fact that these twenty-six airports handle the vast majority of traffle. As such, seizures • and detention are most Iikely to occur, if at aIl, at these airports. - 22-
right to detain aircraft until such time as the amount in respect ofwhich the • seizure was made is paid in full, or until such time as a bond or other security in a fonn satisfactory to it for the amount in respect of which the aircrait was seized is deposited with it; (3) the right, subject to court authorization, to sell seized aircraft and receive payment in full from the proceeds of said sale, in capital, interest and costs and in preference to all other persans; and (4) in the event that a bond or ather security for the amaunt in respect of which the aircraft was seized is deposited with the autharity, the right ta drawn upon the bond or other security ta the full extent afits claim in capital, interest and costs.
1. Seizure or Aireraft
The right ta seize aircraft for unpaid airport charges is the most basic right conferred upon CAAs by the Airport Transfer Act. It is qualified, however, by the necessity of obtaining court authorisation.52 The seizure of aircraft is therefore a two step process: First, leave ta seize and detain must be obtained from the superior court of the province in which any aircraft owned or operated by the person liable ta pay the amount is situated. Secondly, the aircrait must be seized.
1.1 Leave to Seize and Detain Aircraft
1.1.1 Procedure to Obtain Leave
The court authorisation required to proceed with the seizure and detention of aircraft is obtained by way of petition instituted ln accordance with the terms of Section 9 of the Airport Transfer Act. In Quebec, where judicial demands are made by motion unless atherwise
52 This is a fundamental difference between the right to seize and detain conferred upon CAAs and similar rights conferred upon, for example, port authorities in Canada. As a result, the jurisprudence dealing with other detention rights must be • applied with great caution to the Airport Transfer Act. - 23-
provided,53 the petition takes the fonn of a motion for leave to seize and • detain. The motion for leave may either be introductory of suit, or an incidental proceeding where a judicial demand has already been filed against the defaulting carrier. It is presented in practice division of the Superior Court where the aircraft of the debtor airline sought ta be seized are located.
Under normal cireumstances, the petition names as respondent thereto the person liable ta pay the airport charges, generally the airline operating the aireraft. Although not strictly required, consideration should be given to impleading those third parties with rights in the aircraft targeted by the seizure proceedings, such as the aircraft and/or engine lessors, should their identity be known.54 By bringing these parties into the seizure proeeedings at the preliminaty stage, later attempts to quash may be effectively thwarted given that they will have been afforded the opportunity to contest the petition at the stage of its presentation. Moreover, in this fashion, the seizing airport authority sets the agenda for any such third party contestation, rather than the aireraft financier.
The petition need not specifically designate the aireraft sought to be seized, but may simply ask that the court authorise the seizure and detention of any aircraft owned or operated by the debtor and loeated in the province subjeet ta the jurisdiction of the court seized af the matter. Nevertheless, courts will not grant blanket authorisations ta seize any n umber of aireraft at the sole discretion of the seizing airport authority. As a result, the number of aircraft SJught to be seized should be specified in the petition. In the alternative, it is possible ta seek leave ta seize a specifie aireraft, in whieh case it should be designated in the
53 See art. BB(I} C.C.P. e· 54 In practice. it is difficult to obtain this information given that no title registry for aireraft exists in Canada. - 24-
conclusions of the petition. Given the difficulty in identifying exactly by • manufacturer's seriaI number or other relevant criteria a particular aireraft in advance of its inspection, it is prudent to instead seek authorisation to seize and detain any of a specified number of aircraft owned or operated by the debtor airline loeated in the province subject to the jurisdietion of the court seized of the matter. Such an approach ensures that the seizure will not be quashed on the sole ground that the description of the aircraft contained in the judgment authorising the seizure does not conform to that of the aireraft actually seized.
Where the seizing airport authority has reason ta believe that the persan liable to pay the charges is about ta leave Canada or take [rom Canada any aircraft owned or operated by the persan, the petition for leave may be brought ex parte, that is without notifying the debtor in
advance of the presentation of the petition.55 As drafted, this provision gives significant overture to ex parte applications, particularly in the case of carriers operating international services. Given that such carriers routinely remove from the teITÏtory of Canada aircraft in the ordinary course of business, a seizing airport authority could seek leave ta seize and detain such a carrier's aircraft ex parte, on the graund that the persan liable to pay airport charges is about ta take from Canada any aircraft owned or operated by the persan. It would appear from the \vording of section 9(2) that the aircraft sought to he seized ex parte need not even be the aircraft scheduled to depart from Canadian territory.
Notwithstanding the broad scope of applicability of ex parte applications, limited recourse, if any, should be had ta them. Such applications are exceptional, the general rule of civil procedure being that all proceedings must be served upaU. the other parties thereto.56 Courts are reluctant ta decide ex parte in light of principles of natural justice • 55 See Airport Trans/er Act, supra note l, s. 9(2). - 25-
and often demand justification for such an exceptional approach, even • where it is specifically provided for by law. Generally, urgency will need to be demonstrated.
In practice, the petition for leave is sometimes brought under the seizure before judgment provisions of provincial law.57 In Quebec, the Code ofCivil Procedure stipulates that a party may seize before judgment "the movable property which a provision of law permits him to seize in
order to assure the exereise of his rights upon it."58 Thus, the petition for leave to seize and detain under the Airport Transfer Act may be brought in aceordanee with the Code. Sueh an approaeh, however, unneeessarily eomplieates the proeeedings and should be avoided, unless strategie reasons and the circumstances of a particular matter dictate otherwise. Where leave is sought under these provisions, certain consequences will flow therefrom, to the detriment of the seizing authority. For example, suit against the carrier for the unpaid charges will then need to be filed within Cive days following the seizure.59 If the petition for leave is brought directIy under section 9 of the Airport Transfer Act, no such requirement exists. Moreover, seizures before judgment may be quashed in accordance with provincial law,6o the criteria for which differ than the seizure criteria of the Airport Transfer Act. Finally, under the Code of Civil Procedure safeguard and other remedial orders may be sought by those parties opposed to the seizure,61 whereas such orders are not specifically available under the Airport Transfer Act. In light of the foregoing, recourse to the procedural vehicles of provincial law would best be avoided. The Airport Trans/er Act codifies
56 See art. 78 C.C.Q. 57 In Quebec, these provision are codified at Articles 733 et seq. C.C.P. 58 Art. 734(5) C.C.P. 59 See art. 740 C.C.P. 60 See art. 738 C.C.P. • 61 See art. 738(2) & 739 C.C.P. - 26-
a statutory recourse to seize and detain. Ample authority ta petition the • court in accordance with its tenns is contained therein. Where an airline has filed for bankruptcy relief, certain additional procedural requirements present themselves. Under the Bankruptcy and Insolvency Act, reeourse ta the provisions thereof serves to stay all legal proeeedings against the persan having such recourse.62 In the matter of the proposal of Nolisair International, operating as Nationair, the court held that a petition for leave to seize and detain under the Airport Transfer Act eould nat ordinarily be brought once the stay of proceedings was triggered.63 A request ta lift the stay of proceedings must therefore be presented before leave ta seize may be granted. In praetice, these two petitions may be combined in one proceeding presented before a judge sitting in matters of bankruptcy and insolvency.
Under the Bankruptcy and Insolvency Act, a court may declare the stay of praceedings ceases to operate vis-à-vis a particular creditor where "(a) that the creditor or persan is likely to be materially prejudiced by the continued operation of [the stay of proceedings]; or (b) that it is equitable on other grounds to make such a declaration."64 In the Nationair matter, the carrier filed a notice of intention to make a proposal ta its creditors under the Bank:ruptcy and Insolvency Act, at which time the stay of proceedings was triggered. Montreal's airport authority immediately
petitioned the court ta lift the stay 50 that it could seize and detain aireraft owned or operated by Nationair. The court found that the continued application of the stay of proceedings against Aéroports de Montréal caused it serious prejudice in that it deprived it of seeurity for
62 See Bankroptcy and lnsolueney Act, R.S.C. 1985, c. 8-3, s. 69. 63 In the Matter of the Proposai of Nolisair Intemational Ine.; Aéroports de Montréal v. Richter & Associates lne. (26 March 1993), Terrebonne 700-11-000069-932 • (Q.S.C.) at 3 [hereinafter Nolisair lntemationaij. - 27-
the payment of its claim. At the same time, given that the four aircraft • sought ta be seized were not in operation, the court felt that Nolisair International would not suffer any grave prejudice, particularly in light of the fact that it could always post a bond in exchange for the release of the aircraft. The court also found that equity dictated that the stay be lifted.65 As a result, the court lifted the stay, thereby ensuring that Aéroports de Montréal could present its petition for leave to seize and detain. Although an appeal of this judgment was launched, the matter was subsequently settled out of court. As such, this judgment, rendered orally from the bench by Justice Roland Durand of the Quebec Superior Court, constitutes one of the leading cases on point.
In general, seizures under the Airport Transfer Act should be undertaken before recourse is had by the airline to bankruptcy proceedings. Upon bankruptcy, seizures will be very difficult ta obtain, if at all possible, for various reasans including the fact that a strong argument may be made to the effect that upon bankruptcy aircraft on lease are neither owned or operated by the defaulting carrier and would be exempt from seizure under a writ of execution.66 In Nolisair International, the carrier had not made an assignment in bankruptcy, but only filed a notice of intention ta make a proposai. As such, it was cansidered ta have still been operating the aircraft.67
1.1.2 When Leave ta Seize and Detain Will he Granted
Courts will autharise the seizure and detention of aircraft only \\Then the foIIawing criteria are met: (1) The seizing party must be a
ti4 See Bankruptcy and Insoluency Act, supra note 62. s. 69.4. For a discussion of these two criteria. see L.W. Houlden & G.B. Morawetz, The 2001 Annotated Bankruptcy and lnsoluency Act (Scarborough: Carswell. 2001) at 335 et. seq. 65 See Nolisair Intemational. supra note 63 at 4. 66 For a discussion of these elements of the recourse. see Section IV-B-l-1.1.2-f below. • 67 See Nolisair Intemational, supra note 63 at 4-5. - 28-
designated airport authority within the meaning of the Airport Transfer Act. (2) The seizing airport autharity must operate an airport for which it • established landing fees, general terminal fees and ather charges related to the use thereof. (3) Airport charges related to the use of the airport operated by the seizing authority have nat been paid by the persan liable to pay said charges. (4) The aircraft fanning the object of the seizures must be owned or operated by the person Hable to pay the airport charges at the time of the seizures. (5) The aircraft fanning the object of the seizures must be physically located in the province subject to the jurisdiction of the court having authorised the seizures at the time of the seizures. (6) The aircraft forming the object of the seizures must not be exempt from seizure at the time of the seizures.
Each of these elements should be alleged in the petition for leave where authorisation to seize and detain a particular aircraft is sought. When the identity of the specifie aircraft is unknown, however, items four to six above need not be pleaded at the stage of application for leave. A generaI allegation to the effect that the person liable to pay the charges owns or operates aircraft exempt [rom seizure and located in the province subject to the jurisdiction of the court seized of the matter will suffice. In the event, however, that one of thcse three criteria is later found not to be present, such shaH give overture to a petition ta quash the seizures, at which time the whole will be debated.
a. Identity of the Seizing Party
As mentioned above t section 9 of the Airport Transfer Act empowers only "designated airport authorities" ta seize and detain aircraft in accordance with its terms.CJ8 A ,odesignated airport authority" means a corporation or othcr legal body designated as such in accordance with
• M Sec Arrpol1 Transfer Act, supra note 1. s. 9( 1). - 29-
section 2(2).69 According thereto, the Govemar in Council may by order designate any legal entity ta which the Minister of Transport is to sell,
• 70 lease or otherwise transfer an airport as a designated airport authority. Thus, only corporations forming the abject of an arder in council issued under section 2(2) of the Act may avail themselves of the power ta seize and detain aircraft.
In practice, this requirement has not given rise to debate. The seizing party either is or is not a designated airport authority. Little
room for interpretation exists. Even 50, as a threshold element of the recourse, the privy council decree evidencing the designation of an airport authority should be filed and communicated as an exhibit in support of a motion for leave to seize and detain.
b. Operation of Airport by Seizing Party
Additiona1ly, the designated airport authority must operate an airport for which it has established landing fees, general terminal fees and other charges related to the use thereof.71 As all designated airport authorities are designated by the government for the very purpose of operating airports under long term leases, this requirement is straight forward.
c. Nature of the Debt
A designated airport authority may seize and detain aircraft only when airport charges, including interest thereon, related to the use of an airport operated by such authority have not been paid by the persan liable ta pay said charges. Thus, airports may seize aircraft as a means of recovering certain debt only, that is "landing fees, general terminal fees
69 See ibid., s. 2(1). 70 See ibid., s. 2(2). • 71 See ibid., s. 9. - 30-
or other charges related to the use of an airport, and interest thereon."72 Although Dot defmed in the Airport Transfer Act, landing fees are those • fees imposed by the authority for take-off and landing. They are assessed on the basis ofthe weight of each aircraft landing at the airport. Terminal fees relate to the use of terminal facilities and are detennined on the basis of an arriving aircraft's seating capacity. The meaning of "other charges related ta the use of an airport" has not been the subject of jurisprudential interpretation. Nevertheless, guidance as ta the meaning thereof may be sought from the defmition of "airport business" contained in the Act:
"Airport business" means the business of operating an airport and any activities incidental or pertaining to that operation and without restricting the generaIity of the foregoing, includes the rental or leasing of reaI property situated at the airport, the making of investments, the granting of franchises, concessions and licences and the provision of parking facilities at the airport and heliport facilities and bus services serving the airport, but does not include activities relating to the operation of a hotel, motel, restaurant, bar, retai! or wholesale store, a motor vehicle rental or leasing service, a taxi or limousine service, a freight transportation service, an airline, an aircraft rentai or leasing service, an aircraft fuelling or maintenance service, a currency exchange service or an amusement or entertainment centre or any prescribed activity;73
A reasonable argument may be made to the effect that all charges imposed on a persan by an airport authority in the context of its "airport business" constitute "charges related ta the use of an airport" within the meaning of section 9. In any case, the scope of charges for which aircraft may be seized is undoubtedly wide, given the wording of section 9 and its rationale examined above.
Even so, depending on the meaning courts will ascribe ta "other charges related to the use of an airport," it may very weli be that the payment of certain carrier debts is not secured by section 9 of the Act.
72 See ibid., s. 9(1). • 73 Ibid., s. 8(4). - 31 -
For example, it is unclear whether sums due to an airport for ground • side services such as rent under hanger leases would qualify as "charges related to the use of an airport." The matter has yet to be the object of judicial commentary.
A debtor-creditor relationship must exist between the person Hable to pay the airport charges and the seizing airport authority. Thus, a particular airport authority may seek leave to seize and detain only in collection of a debt due to it by one of its airport users. Toronto's airport authority could not, for example, seize and detain aircraft located at Pearson International for a debt due by the carrier to Montreal's airport authority. Instead, Aéroports de Montréal would need to seek leave from Ontario courts to seize and detain aircraft at Pearson International.
The debt must be due and exigible at the time the petition 1S brought. A debt is due \\"hen it is contracted and the consideration for which it was contracted is provided. In the case of airport services, the debt is due when the services are rendered. For a debt to be exigible, however, the underlying obligation to pay must not be subject to a suspensive term, that is a future and certain event.74 For example, accounts for services rendered are payable in accordance with the agreement between the parties, \vhich may provide that accounts are payable upon issuance of an invoice therefor or upon the expiry of a specified period of time, often thirty days from issuance of the account. In either case, they are subject ta a term the satisfaction of which is required before the debt becomes exigible (i.e., the passage of time).
Obligations subject to a suspensive term become exigible in one of three ways: First and foremost, the arrivaI of the term renders the
• 74 Art. 1508 C.C.Q. - 32-
obligation exigible.75 According to Article 1513 of the Civil Code of Quebec, what is due with a term may not be exacted before the term • expires.76 A upon the expiry of the term, what is due may he contrario, exacted. Secondly, the renunciation of the term renders the obligation immediatelyexigible.77 The party for whose exclusive benefit a term has been stipulated may renounee it, without the consent of the other party. Under normal circumstances, a term is for the benefit of the debtor, unless it is apparent that it was stipulated for the benefit of the creditor.78 Finally, the forfeiture of a term renders the obligation exigible immediately.79 In this regard, a debtor loses the benefit of term if he beeomes insolvent, is deelared bankrupt or if by his own act and without the consent of the creditor he reduces the security he has given ta him.so He aIso loses the benefit of the term if he fails ta meet the conditions in consideration of which it was granted to him.S1 ContractuaI clauses may aIso provide for ather graunds giving rise to the forfeiture of a term.82
d. Identity of the Seized Aireraft
1. Aireraft "Owned or Operated" by the Persan Liable to Pay the Airport Charges
The Airport Transfer Act codifies certain restrictions on the right to seize and detain aireraft related ta the identity of the aireraft which may be seized. Section 9 pravides that the aireraft fanning the object of the seizures must have been "owned or operated" by the persan liable ta pay
75 See ibid.: "An obligation with a suspensive tenn is an existing obligation that does not become exigible until the occurrence of a future and certain event." 76 See art. 1513 C.C.Q. 7ï See art. 1515 C.C.Q. 78 See art. 1511 C.C.Q. 79 See art. 1515 C.C.Q. 80 See art. 1514(1) C.C.Q. 81 See art. 1514(2) C.C.Q. 82 These contractual clauses are nevertheless subject to certain limitations. See • e.g. Arts. 2332, 1905 &1437 C.C.Q. - 33-
the airport charges at the time of the seizures.83 Unfortunately, neither "owner" or "operator" are defmed in the Airport Transfer Act or in the • Aeronautics Act.84 Guidance as to the meaning of these terms must therefore be sought elsewhere.
The Canadian Aviation Regulations promulgated under the Aeronautics Act define "owner" in respect of an aircraft, to mean "the persan who has Iegal cu.stody and control of the aircraft."85 This definition, brought into force after the adoption of the Airport Transfer Act, was designed to address specifie regulatory circumstances, including the registration and marking of aircraft.86 In fact, for registration purposes, "an owner has Iegal custody and control of a Canadian aircraft when the owner has complete responsibility for the operation and maintenance of the aircraft."s7 As defined by the CARs, the "owner" of the aircraft is in most cases the airline given that they generally have custody and control over the aircraft in the ordinary course of business.
This custody and control criteria was adopted in one of two judgments touching on the interpretation of "owner" within the terms of section 9 of the Act. In Boru Holdings v. Aéroports de Montréal, the Superior Court examined this issue in 1993 and found that the airline had legal custody and control of the aircraft seized by Montreal's airport authority on the ground that the airline had insured the aireraft. Such insurance demonstrated the existence of an insurable interest which could only fiow from the fact that it had custody and control of the
83 See Airport Transfer Act. supra note 1, s. 9(1). 84 Words and expressions used in section 9 of the Airport Transfer Act have the same meaning as in the Aeronautlcs Act. The definitions of the Aeronautics Act are therefore ineorporated into section 9 of the Airport Transfer Act by reference. See ibid., s. 9(5). 85 Canadian Auiation Regulations, S.O.R./96-433, s. 101.01(1) [hereinafter CARSJ· 86 See ibid., s. 202.01 et seq. For additional regulatary provisions impasing an obligation or granting a right ta the "owner" of an airerait, see ibid., ss. 200.01, 202.03, • 501.01,509.05 & 605.92. - 34-
aireraft as it was not the owner of the aireraft in the ordinary sense of the • word.88 In the only other case on point, the Superior Court, on the basis of somewhat dubious reasoning,89 equated the meaning of "owner" ta the ordinary sense of the ward, that is to include a person with an ownership interest or title to the property.90 The court did not consider or apply the "legal custody and control" criteria.
Where the person liable to pay the airport charges is the true owner of the aireraft it operates in the ordinary course of business, the aireraft may be seized under the Airport Transfer Act, irrespective of the criteria applied, given that the airline has legal eustody and control of the aireraft and is the true owner. Where the airline is not the true owner beeause, for example, the aireraft are on lease, certain problems arise.
The definition of "operator" within the meaning of section 9 is equally unelear. The CARs define "operator" as "the persan that has possession of the aireraft as owner, lessee or otherwise."9l Once again, however, this definition \\'as drafted principally with aviation safety issues in mind as the operator is subject ta certain regulatory requirements contained in the CARs.
Additional reference ta the operation of aircraft may be found ln the CARs, whieh provide that "no persan shall operate an aircraft ln
87 See ibid., s. 202.35(3). 88 See Boru Holdrngs v. Aéroports de Montréal et. al. (7 May 1993) Terrebonne 700-11-000069-932 & 700-05-000489-934 (Q.S.C.) at 4 & 5 [hereinafter Boru Holdings). 89 In this case, the Court focused on the meaning of "owner" within the terms of the Ciuil Air Navigation Se11Jtces Commercialisation Act and simply applied the same meaning to the Airport Transfer Act See Aéroports de Montréal v. Inter Canadian (1991) Inc. et. al. (9 November 2000) Montreal 500-05-054667-991 (Q.S.C.) at paras. 127 to 140 [hereinafter Aéroports de Montréal v. Inter Canadian]. 90 See ibid. at para. 140. • 91 CARS, supra note 85, s. s. 101.01( 1). - 35-
Canada unless it is registered in Canada, in a contracting state or in a • foreign state that bas an agreement in force with Canada that allows an aircraft that is registered in that foreign state to be operated in Canada."92 Thus, the operator of an aircraft is the person to whom the aircraft is registered. The Aeronautics Act defines "registered owner," in respect of aircraft to mean "the persan ta whom a certificate of registration for the aircraft has been issued by the Minister (...] or in
respect of whom the aircraft has been registered by the Minister."93 The aperator is therefore the registered owner (i.e., the person to whom a certificate of registration for the aircraft has been issued). In most cases, the airline liable ta pay the charges is the registered owner of the aircraft fonning part of their fleet.
In the normal course of things, few problems are encountered with respect ta the limitation contained at section 9 of the Act ta the effect that only aireraft owned or operated by the person liable to pay the charges may be seized. Where the airline liable ta pay the airport charges continues ta operate in the ordinary course of business, aircraft owned by it or on lease (i.e., not owned by the carrier but by a third party leasing company), may be seized under the Airport Transfer Act on the ground that such aircraft are "operated" by the carrier within the meaning of the Act. Where, on the ather hand, the person liable to pay the charges has ceased operations, de-registered its aircraft and terrninated its leases, problems may arise qualifying such aircraft as "o\vned" or "operated" by the carrier. In addition, complications also arise where aireraft are \vet-leased from carrier to carrier or the object of
similar arrangements.94
92 Ibid.• s. 202.13(2). 93 Aeronautics Act, supra note 1, s. 3(1). 94 For a discussion of wet-Ieasing, see O. Bunker, "Aireraft Wet Leasing: The • Perils and the Benefits" (2000) XXV Ann. Air & Sp. L 67. - 36-
ll. Are Seizures Limited ta the Specifie Aircraft for Which the Unpaid Airport Charges Were lneurred? • Does it suffice, however, that the aireraft sought to be seized are owned or operated by the person liable to pay the charges or must the aireraft seized and detained aIso be the specific aireraft for which the unpaid airport charges were iDeurred? On the basis of the French wording of section 9, it has been argued that only the specifie aircraft for which the unpaid airport charges were incurred may he seized and detained.95 This proposition, however, is not supported by the language of section 9(1), its underlying rationale and the case law on point.
In relevant part, the French version of section 9 reads as fol1ows:
À défaut de paiement des frais fixés par elle [. . .] l'administration aéroportuaire désignées peut [...) demander à la juridiction supérieure de la province où se trouve l'aéronef dont le défaillant est propriétaire ou utilisateur de rendre une ordonnance l'autorisant à saisir et à retenir l'aéronef [. . .).96
The aircraft for which authorisation to seize and detain may be granted by a court is the aircraft owned or operated by the person liable to pay the airport charges and located in the province subject to the jurisdiction of the court seized of the matter. The second appearance of "l'aéronef' in the text of section 9 quoted above is not followed by any language limiting it to the aircraft which incurred the charges. Instead, the second appearance of "l'aéronef' refers to the same aircraft previously mentioned in the text of section 9, that is "l'aéronef dont le défaillant est propriétaire ou utilisateur." It is therefore submitted that the French version of the la\v does not support the limitation sought ta be read into the law.
95 This argument was brought forward by the owners and lessors of the aireraft seized and detained in the matter of the bankruptcy of Inter Canadian. See Aéroports de Montréal v. Inter Canadian, supra note 89. • 96 Airport Trans/er Act, supra note l, s. 9(1). - 37-
Whereas the French version of section 9 is arguably unclear on • this issue, the English version is nat. In relevant part it provides as follows:
Where the amount of any [airport] charges set by a designated airport authority (...] ha[ve] not been paid, the authority may, [...] on application to the superior court of the province in which any aircraft owned or operated by the person liable to pay the amount is situated, obtain an order of the court [...] authorising the authority to seize and detain aïrcraft.97
Once again, the only limitations on the identity of the aircraft which may be seized and detained are that the aircraft be owned or operated by the person Hable to pay the charges. In addition, a court may not authorise the seizure and detention of aireraft lacated in a province other than the province subject to its jurisdiction. This latter caveat, however, is not in effect a limitation on the right to seize and detain as much as a limitation on the authorisation that may be given by a particular court given that airport authorities are free to petition any Superior Court in Canada.
It is true that the Law does not stipulate that the authority may seize and detain "any" aireraft, as is the case with Section 56 of the Civil Air Navigation Services Commercialisation Act.98 Nevertheless, a reasoned interpretation of the English version of the Airport Transfer Act, giving the
97 Ibid. 98 See Canadian Air Navigation Services Commercialisation Act, S.C. 1996, c. 20, s. 56 [hereinafter CANSCA): (1) In addition te any other remedy available for the collection of an unpaid and overdue charge imposed by the Corporation for air navigation semces, and whether or not a judgment for the collection of the charge has been obtained, the Corporation may apply to the superior court of the province in which any aircraft owned or operated by the person Hable te pay the charge Îs situated for an arder, issued on such terrns as the court considers appropriate. authorising the Corporation to seize and detain any such aircraft until the charge is paid or a bond or other security for the unpaid and overdue amount in a forrn satisfactory to the Corporation is deposited with the Corporation. (2) An application for an arder referred to in subsection (1} may be made ex parte if the Corporation has reason to believe that the person liable to pay the charge is about to leave Canada or take from Canada any aircraft owned or operated by the person. (3) The Corporation shaH release from detention an aireraft seized under this section if (a} the amount in respect of which the seizure was made is paid; (b) a bond or other security in a fonn satisfactory to the Corporation for the amount in • respect of which the seizure was made is deposited with the Corporation; or - 38-
words used therein their ordinary meaning, results in only one limitation as to the identity of the airerait whieh may be seized thereunder: that the • aircraft be owned or operated by the person liable to pay the airport charges.
This conclusion is supported not ooly by the text of the law, but by the rationale for and purposes of section 9(1) of the Act, that is to ensure that airport charges are paid. Limiting the ability ta seize and detain to those airerait whieh incurred the charges leads to a result clearly not intended by Parliament. If such were the case, designated airport authorities would need to seize and detain many more aireraft that at present ta secure their elaims against a debtor airline. Take the following hypothetieal illustration: A regional carrier operating a fleet of twenty aircraft in Eastern Canada fails ta pay airport charges levied by certain CAAs. These charges were levied as a result of charges impased on the carrier for services and facilities related to each of its twenty aircraft. In such a case, ta secure the amount of arrears due ta them, each airport authonty would need to seize and detain the entire fleet of aireraft, thereby effectively shutting down the carrier, a result elearly not intended by Parliament. The seizure of one aireraft would not he suffieient because sueh seizure would only seeure payment of the airport charges attributable ta that particular aireraft, a neeessary eorollary of the argument that the identity of the aircraft which may he seized is limited to the aireraft which incurred the charges.99
(cl an arder of a cOUrt directs the Corporation to do so. 99 The argument that only the aireraft which incurred the charges may be seized has important implications not only as regards the identity of the aircraft which may be seized under the Act, discussed above, but aIso on the extent of the right to detain and sell the aircraft so seized. At Section IV-B-2.1 below, we conclude that an aircraft legaIly seized may be detained until payment of al! outstanding airport charges due by the airline to the seizing airport, and interest thereon. If it is accepted that CAAs may only seize the aircraft which incurred the charges, however, it would follow that aircraft could only he detained until such time as those specifie charges are paid, as opposed to • ail the charges incurred by the defaulting airline. Similar implications exist on the right - 39-
Moreover, whereas landing fees and terminal fees may be attributed ta specifie aircraft, ather charges for the use of airports do nat • relate ta specifie aircraft. Althaugh these latter charges are related ta the use of airports and as such default in the payment thereof gives overture ta the seizure and detention of aircraft in aecordance with section 9(1), reading into the lawa limitation as to the scope of the seizures ensures that CAAs would not be in a position to seize for the nan-payment of sueh charges, a result surely not intended by the legislator.
The conclusion that any aircraft owned or operated by the persan Hable to pay the charges may be seized without regard to whether that specifie aireraft incurred the charges is supported by all cases treating the seizure and detention of aircraft under the Airport Transfer Act. In Nolisair International, four aireraft were seized by Montreal's airport authority, the identity of whieh had nothing ta do with whether charges were attributable ta these specific aircraft. lOO Moreover, the issue was specifically pleaded before and rejected by the Superior Court in the matter of Inter Canadian in more than one instance. On December 10, 1999, Justice Sylvia Borenstein, j.c.s., rejected this argument brought forward by the owners and/or lessors of the aircraft and authorised the seizure and detention of aircraft irrespective of the charges attributable ta each. The Honourable Judge went on to ruIe that the seizing airports cauld detain the aircraft until such time as their total claims were paid, not the claims attributable to each aircraft. lOl Justice Roland Tremblay, j .c.s., aIso specifically treated this question and concluded that the
to sell the aircraft and receive payment from the proceeds by preference. For a discussion of the right to sell aircraft which have been seized and detained, see Section IV-B-3.l below. 100 It does not appear, however, that the issue was raised or considered by the court. See Nolisair International, supra note 63. 101 See St. John's Airport Authority et. al. v. Inter Canadian (1991) Inc. (10 December 1999) Montreal 500-05-054694-995 (Q.S.C.). This judgment was not • appealed. - 40-
position brought forward by the owners of the aircrait could not be • supported in law.102 Restricting the right ta seize and detain to specifie aircraft for which charges were incurred furthers nether the purposes of the law, nor the interests of air carriers. Sueh a restriction is not supported by the language of the law or its legislative history. The only interests served therebyare those of the lessors of aireraft, who eould obtain the release from detention of their particular aircraft by paying only those airport charges specifically related thereto, and not all charges which the carrier owes to the seizing authority.
111. Number of Aircraft Which May be Seized
Closely related ta issues regarding the identity of aircraft is the matter of how many aireraft may be seized and detained. At the outset, it appears that the la\v provides no guidance as it contains no limitation. Nevertheless, general principles of law dictate that CAAs may not abuse their seizure and detention rightS. 103 As such, the number of aireraft which may be seized is the number which secures payment of the outstanding aecounts. Same \\rill depend on the value of eaeh aireraft. 104
e. Location of the Seized Aireraft
The aireraft sought to be seized must be loeated in the territory of Canada. Leave must be obtained from the courts of the province where the aireraft sought ta be seized is aetually loeated. As indicated above, this eaveat in no way limits or restriets the seizure and detention rights
102 See Aéroports de ftrfontrëal \'. Inter Canadian, supra note 89 at paras. 143- 147. 103 See arts. 6 & 7 C.C.Q. 104 See Aéroports de Afontréal v. Inter Canadian (1991) [ne. et. al. (13 December 1999), Montreal 500-05-054667-991 (Q.S.C.). In this case, the Superior Court refused • to authorise the seizure and detention of additional aircraft by Aéroports de Montréal, - 41 -
of CAAs in that they May petition any appropriate province's Superior • Court, not only the court of the province in which they are domiciled. f. Aircraft Exempt from Seizure
Notwithstanding that all of the foregoing criteria have been met, certain aircraft are exempt from seizure and detention under the Act. According to section 10 thereof:
10. (1) Any aireraft of a person referred to in subseetion 9( 1) or (2) that would be exempt frOID seizure under a writ of execution issued by the superior court of the province in which the aircrait is situated is exempt from seizure and detention under that subsection.
(2) The Governor in Council may, by regulation, exempt any aircraft from seizure and detention under section 9. 105
Each of these two exemptions are examined below.
1. Aircraft Exempt from Seizure by Regulation
Section 10(2) provides that the Governor in Council may, by regulation, exempt any aircraft from seizure and detention. He has unfettered discretion ta do sa, for whatever reasons he sees fit. Such a decision would in normal circumstances not be subject to challenge before the courts.
This provision serves ta ensure that considerations of international comity and inter state relations trump the collection efforts of airports \\rhere appropriate. At the time the Airport Transfer Act was amended ta empower CAAs to seize and detain aircraft, it was explained in sornewhat uncertain tenns during the hearings before the Standing Senate Committee on Transport and Communications that section 10(2) was designed to allow the federal cabinet ta prevent the seizure and detention
whieh by that time had aIready seized two aireraft, given that it did not demonstrate that it was not aIready adequately secured. • lOS Airport Transfer Act, supra note l, s. 10. - 42-
of aireraft in certain politieally sensitive cases.I06 Thus, in the event that • the seizure of a particular aireraft eould compromise Canadian interests, the Govemor in Couneil eould exempt sueh aircraft from seizure.
The effectiveness of this provision has remained untested as no such exemptions have yet been proclaimed. Nevertheless, at the outset it wauld appear flawed in that CAAs may proceed very rapidly to seize aireraft, without giving notice to Transport Canada, which in any case is not required under the procedure set forth in the law. In praetice, any exemption under this provision of the Act would very likely be presented after the aircraft had already been seized. Thus, instead of preventing the seizure, it could arguably serve as a ground ta quash one that had recently been undertaken. Whether such an attempt to quash would be successful is open for debate. A convincing argument cao be made to the effect that if the aireraft was not exempt from seizure at the time of the seizure, its seizure may not be subsequently quashed on this ground.
Il. Aireraft Exempt from Seizure Under a Writ of Execution
Of more praetieal importance is the section 1O( 1) proscription against the seizure of aireraft that would be exempt from seizure under a \vrit of execution issued by the Superior Court of the province in which the aireraft is situated. 107 In Canada, a writ of exeeution serves ta enforee a judgment for the payment of a sum of money by means of the seizure and sale of a debtor's property, from which sale proceeds the creditor is paid. Execution proceedings are governed by provinciallaw.
In Quebee, as in the other provinces of Canada, a creditor may seIze and sell the movable property of his debtor. 10S Therefore, where aireraft are owned outright by a defaulting airline, they would not be
106 See Airport Transler Act Debates. supra note 35 at 23:42. 107 See Airport Transler Act, supra note l, s. 10(1). • 108 See arts. 569(1) & 580 C.C.P. - 43-
exempt from seizure under a writ of seizure in exeeution and as such are • not exempt from seizure under the Airport Transfer Act. 109 Where airerait are on lease, however, or the objects of conditional sales agreements such that ownership only transfers to the airline upon full payment, the matter is somewhat more complicated. In these cases, the aircraft sought to be seized does not constitute property of the debtor airline. In the common law provinces of Canada, the fact that aircraft are not owned by the debtor airline is not an obstacle to their seizure and detention as the debtor's leasehold interest is an asset thereof.110
This problem was encountered in a recent high profile case involving the seizure of an Airbus A310 on lease from the manufacturer to Aeroflot. In that case, a Canadian aerospace company obtained an arbitration award against Aeroflot stemming from a commercial dispute with Aeroflot having nothing to do with its air transport operations. The award was affirmed by the Stockholm District Court, which granted the Canadian company a judgment enforceable against Aeroflot's assets. The creditor then proceeded to petition the Quebec Superior Court for a reciprocal enforcement order, which was granted, thereby allowing it to execute against any of Aeroflot's assets found in Quebec. Faced with the fact that the A31ü was not owned by Aeroflot, but simply on lease from Airbus, and as such exempt from seizure under the civil law of Quebec, the writ only targeted the fuel, safety equipment, in flight food and duty free items owned by Aerofiot and located on the aircraft, parked at that time at Dorval International Airport. As a result, the aircraft was
109 Certain property belonging to the debtor is specifically exempted from seizure at Articles 552 to 553.2 of the Code of Civil Procedure. None of these provisions could serve to exempt an aircraft fonning part of the patrimony of a debtor airline from seizure, however, as they target items such as those necessary for the life of a household, instruments of \....ork needed for the exercise of a professional activity, disability benefits and the like. These are aIl items considered to be either necessary for life, hors commerce or for which sorne other public policy reason serves to exempt them from seizure. See arts. 552 et seq. C.C.P. • 110 For a discussion of this issue, see Gray, supra note 9 at Canada-34. - 44-
detained because those assets could not be separated from the aireraft. This creative approach resulted in an undertaking ta make full payment • within a reasonable delay, which undertaking was guaranteed by the Russian embassy in Ottawa. The A310 was subsequently released within twenty-four hours.lll
In light of the foregoing, a designated airport authority should proceed to the seizure of airerait at the first sign of financial diffieulty on the part of the carrier. Most aireraft leases pravide that they may be unilaterally resiliated by the lessor upon material default by the carrier, the whole by simple written notice to the carrier without the necessity of legal praeeedings. Similar default and terminatian clauses exist in conditional sales agreements. If the lease or sales agreement is so tenninated prior to a seizure, the carrier would no longer have any leasehold or ather interests ln the aireraft. They would therefore be exempt from seizure under a provincial writ in execution and as a consequence also exempt from seizure in accordance with section 10(1) of the Airport Transfer Act.
1.2 Seizure of Aircraft Once Leave Has Been Obtained
Where the foregoing criteria have been met and leave to seize and detain has been obtained from the court, the seizing airpart authority must proceed ta the aetual seizure and detention of the aireraft as the judgment granting leave does not in itself constitute the seizure. Given the esoterie nature of the recourse and its implernenting legislation, however, sorne ambiguity exists as to the manner in which sueh a seizure is actually undertaken.
III The judgment of the Superior court in this matter is unreported. See "Russian Jet Freed in Montreal - Aeroflot Plane was seized in Canadian lnvestor's Fight • Over Luxury Moseow Hote!" The Globe and Mail (1 April 1998) Al. - 45-
Under provincial law, seizures before or after judgment are undertaken by a bailiff under the authority of a writ issued byan officer
• COurt.112 of the The physical seizure may take a number of forms, but the most common in Quebec is a seizure without repossession. The bailiff identifies the property at issue and draws up minutes of seizure, appointing at that time a guardian of the property. In normal circumstances the property is entrusted to the debtor, who must aceept it and safeguard it. 113 Where sufficient cause exists, a guardian other than the debtor may be appointed.1l4
Under the Airport Transfer Act, however, it would appear that a writ is not required to seize and detain aireraft. A bailiff may proceed ta the seizure by drawing up minutes thereof and leaving a copy with the appointed guardian of the aireraft. The seizure is in effect authorised by the judgment granting leave; no requirement for the issuanee of a writ of seizure exists. Even sa, in praetice the judgment granting leave
authorises the seizure and detention and may, where 50 requested, arder the issuance of a writ of seizure before judgment. In such cases the hailiff proeeeds to the seizure in aceordance with both the judgment and \vrit issued thereunder.
2. Detention oC AireraCt
Onee legally seized, aireraft may be detained until such time as:
(1) the amount in respect of \\rhich the seizure was made is paid; 115 (2) a bond or other security in a form satisfactory to the authority for the amount in respect of \\-hich the aircraft was seized is deposited with the
112 For seizures in execution, see art. 580 C.C.P. 113 See art. 583 C.C.P. 114 See art. 583.1 C.C.P. • 115 See Airport Transfer Act, supra note l, s. 9(3). - 46-
authority; 116 or (3) a court orders the release from detention of the • aïrcraft.117 2.1 Release on Payment
Section 9(3) of the Aet stipulates that U[ •••) a designated airport authority is not required to release from detention an aireraft seized under subsection (1) or (2) unless the amount in respect of which the
seizure was made is paid." 118 A contrario, when the lIamount in respect of which the seizure was made" is paid to the authority, it must release from detention the aircraft it has seized.
According to section 9( 1), seizures are made in respect of "landing fees, general terminal fees or other charges related to the use of an airport, and interest thereon."1l9 The qualifying language "related to the use of an airport" serves ta ensure that aireraft are nat detained for non payment of any and aIl accounts which may be autstanding to an airport, but only those directly related to the air side of its operations. Airport authorities may therefare detain aireraft until such time as their clairn for such charges is paid in capital and interest, where such interest runs from the date the accounts were due until the date of the payment. If a contractual rate of interest is not provided for in the relevant documentation, the legal rate wauld apply.120 It would appear that a CAA could not insist on obtaining costs, whether judicial or extra judicial, prior to the release of an aircraft it has seized.
116 See ibid., s. 9(4). 117 See ibid., s. 9(31 . 118 Ibid., s. 9(3). 119 Ibid., 5.9(1). • 120 Art. 1617 C.C.Q. - 47-
2.2 Release on the Posting of a Bond or Other Security
• According ta section 9(4) of the Act, Il[al designated airport authority shall release from detention an aireraft [it has] seized [...] if a bond or other security in a form satisfactory to the authority for the amount in respect of which the aircraft was seized is deposited with the authority."121 The rationale underlying this provision is that the seizure of aireraft serves ta guarantee payment by giving the seizing airport authority rights in an asset of value. Whether sueh seeurity takes the form of an airerait or sorne equivalent is irrelevant. Thus, interested parties who desire to contest the elaim of the seizing airports are given the opportunity ta substitute other security in the place of the seized aircraft while such contestation plays out in the courts. In this fashion, the aircraft may be re-marketed without eompromising the security given to CAAs by the Act.
In praetiee, those parties with an interest in obtaining the release of an aircraft detained by an airport authority are the operator of the aireraft and its owner (i.e., conditional seller or lessor) or hypothecary creditor, as the case may be. Even sa, it would seem from the wording of section 9(4), which does not speeify who may post security, that security may be posted by anyone, not only the person liable to pay the airport charges. This conclusion is supported by relevant case law. I22
The posting of seeurity should be a neutral event as regards interested parties. By accepting security in exchange for the release of
l2l Airport Transfer Act. supra note l, s. 9(4). l21 In the matter of Inter Canadian, the only case where security was deposited under the Airport Transfer Act. bonds were posted by the various conditional sellers and/or lessors of Inter Canadian's Oeet, not by Inter Canadian itself, which by that time had been deemed to have filed an assignment in bankruptcy. In this case, the majority of seizures were lifted in exchange for the posting of bonds by the owners and/or lessors in accordance with the judgrnent of the court. See Aéroports de Montréal v. Inter • Canadian, supra note 89. It should be noted, however, that the posting of security by - 48-
seized aireraft, an airport authority should not be placed in a weaker position than it was in when in possession of the aircraft. A number of • issues therefore arise with respect the release of aircraft under this section of the Act, each of which concerns one of the following: (1) the fonn of security; or (2) the amount thereof.
2.2.1 Form of the Bond or Other Security
At the outset, the text of section 9(4) makes it clear that the fonn of security other than a bond must be satisfactary to the authority. Thus, for example, the text of a letter of guarantee, and all matters related ta the fonn thereof, must meet with the concurrence of the authority. Similarly, we are of the view that the fonn of both a bond must aIso be acceptable to the seizing airport authority. Although certain ambiguity exists regarding whether the qualifying language "in a fonn satisfactary ta the authority" applies to a bond or only ta "other security," no justification exists for submitting the fonn of a bond to the unfettered discretion of the party seeking to post it while giving the authority a say on the forro of another guarantee. It is clear, however, that the authority may not insist on a letter of guarantee or other security when a bond is proposed. In other words, the nature of the security is up ta the party seeking the release of aircraft. The fonn thereof, however, must meet with the concurrence of the seizing authority.
Airport authorities having successfully fought off the inevitable attempts ta quash or otherwise challenge their seizures must ensure that they are not thereafter caught in litigation with the issuer of security pasted in the place and stead of the aircraft. Ta avoid any such problems, the form of the bond or ather guarantee, including the language thereof, must he carefully examined. The language of the bond
these parties was not contested on this point by the seizing airport authorities. Their • contestations focused instead on the form of security and amount thereof. - 49-
or letter of guarantee is particularly important because the terms and conditions thereof determine when and how the airport authority may • draw upon the bond in payment of its outstanding account.
In practice, bonds are the preferred vehicle for the security to he provided in exchange for the release from detention of the aircraft at issue. They do not draw on the credit facilities of the party requesting the issuance of the bond, and are less costly that a letter of guarantee from a chartered ba."1k. It goes without saying, however, that a letter of guarantee is preferable to the seizing airport authority as the defences which may be invoked by the issuer thereof are extremely limited. 123 [n addition, the solvency of the issuer is never a concern, unlike in the case of bonds. It must be recalled that a bond is simply a promise to pay when certain conditions are met. The value of such a promise as security rests in large part on the party making the promise. When that party is a chartered bank little cause for concern exists. When that party is a private bonding company, however, the solvency thereof must be examined. For this purpose, recourse may be had ta third party bond rating companies ta ensure that bonds are issued by a company whose solvency is nat in doubt.
Aside from the text of the security, consideration must be given ta its fonn v.rith a view to ensuring that it was validly issued. In the matter of Inter Canadian, certain bonds delivered ta a number of airport authorities were later found nat ta have been validly issued and as such very likely unenforceable. Although rectified and reissued by the parties having pasted the bonds, the airport authorities having released the aircraft in exchange for the defective bonds risked compromising their claims.
123 This problem with bonds may be partially if not Cully addressed by appropriate language in the security instrument whereby the issuer renounces ail • defences, except those related to fraud by the airport authority. - 50-
These problems related to the issuance of bonds may be averted by way of a legal opinion from counsel for the surety confuming that the • bond is validly issued and enforceable against the surety in accordance with its terms. Such opinions are not uncommon in corporate fmance transactions where bonds are issued to guarantee payments. Although less comman in the context of litigious matters such as these, certain precedent does exist. 124 If such an opinion cannot be obtained for sorne reason, counsel for the authority will need ta satisfy itself that the bond was validly issued and delivered. Ta do sa, it should insist upon receiving certified extracts of resalutions of the board of directors of the surety conceming the formalities goveming the issuance of bonds by it. In such a manner, the authority of the signing officer and related matters may be verified.
2.2.2 Amount of Security
The amount of a bond or other security that must be deposited with the authority in consideration of the release [rom detention of aircraft is the "amount in respect of which the seizure was made."125 As discussed above, such amount is the airport's capital claim for airport charges as weIl as interest thereon.126 The amount of interest is a function of the rate thereof and the time during which the debt was accumulating interest. Whereas the interest rate is known,127 the outside date used to calculate such interest, that is the date on which the airport authority finally receives payment for the outstanding arrears,
124 In the matter of Inter Canadian, at least one airport authority insisted on a legal opinion by independent counsel prior to releasing aireraft it had seized. Mter vigorous objections by eounsel for the party seeking to post the bond, such a legal opinion was indeed provided, ensuring that the bond in exchange for which aircraft \Vere being released would be enforceable against the surety in accordance with its terms. 125 Airport Transfer Act, supra note 1, s. 9(4). 126 See ibid., s. 9(1). 127 In Quebec. the applicable interest rate will be the contractual rate or, in the • absence thereof, the legal rate. See Art. 1617 C.C.Q. - 51 -
is unknown at the time the bond is posted. Issues related to the amount • of the security are further complieated when more than one aircraft has been seized by a designated authority, or where more than one authority has seized the same aireraft. How, therefore, in the amount to be determined?
The answer adopted by the courts is that the outside date used to calculate applicable interest should he estimated in light of the circumstances of the matter. Once reasonably estimated, the total amount of interest is added to the original debt in capital ta determine the estimated total potential liability of the debtor. This estimate constitutes the magnitude of security that must be deposited in
exchange for release of the aireraft. 128
ln the matter of Inter Canadian, the foregoing method was adopted and applied ta the release of aireraft under the Airport Transfer Act. Prior to judgment on the merits of the case, certain owners of aircraft seized by various authorities sought the release thereof in exchange for security in the amount only of the capital claims of the airport authorities, with no provision for interest. Having refused ta release the aircraft on such terms, the matter was brought before the courts by way of petition to force the bonding of the aircraft instituted by the owners under section 9(4) of the Act. After proof and hearing, the Superior Court held that a seizing authority was bound ta lift its seizure of a particular aircraft in exchange for security in the amount of one and a half times its capital clairn for unpaid airport charges, divided by the number of aircraft it had
128 This method of detennining the amount of security has been applied in numerous maritime cases, where security may he posted in exchange for the release
from detention of ships. See e.g. t Viktor Ouerseas Ltd. v. Deiulemar Compagnia Di Nauigazione (1997), 143 F.T.R. 298. In addition, this method was specifically applied to security posted under the Airport Transfer Act in the matter of Inter Canadian. See In the matter of the bankruptcy of Inter Canadian (1991) Ine.; Newcourt Credit Group v. Greater Toronto Airports Authority et. al. (7 July 2000), Montreal 500-11-012906-992 • (Q.S.C.) [hereinafter Newcourt v. GTAAI. - 52 -
seized to guarantee payment of said claim.129 In other words, the magnitude of the bond required to obtain release of all the seized aireraft • was held to be IS00k of the arrears outstanding to each authority having so seized. This decision was based on an average interest rate of approximately ten percent and a time factor of approximately five years or so before the authorities would be paid, said time factor having been determined in light of the judicial contestations pending before the
courts. 130
The following hypothetieal example illustrates the results of the
judgment rendered by the Quebec Superior Court. 131 Millennium Airlines owes $1 million to each of Aéroports de Montréal and Greater Toronto Airport Authority for airport charges incurred for the use of Dorval and Pearson International airports, respectively. Bath authorities seize and detain the only aireraft operated by Millennium in Canada, say an aircraft bearing manufacturer's seriai number 001. Ta obtain the release from detention of this aircraft, Millennium would need ta post two separate bonds, one with Aéroports de Montréal and the other with Greater Toronto Airport Authority. Each bond would need to be in the amount of $1.5 million, for a total of $3 million or one and a half times its debt ta the authorities in capital alone. To further complicate matters, suppose that Millennium operated a second aircraft in Canada, which was aiso seized by both Aéroports de Montréal and Greater Toronto. To obtain the release of only aircraft 001, two bonds would need to be once again posted, this time each in the amount of $750,000,
129 See Newcourt v. GTAA. rbzd. at 4. 130 The judge seized of the matter does not specifically mention the interest rate or time factor upon which the judgment was based, but analysis of the whole leads to the conclusion that the judge adopted a middle position between the submissions of the parties. The majority of concemed airport authorities pleaded in favour of a bond in the amount of two hundred percent of their capital claims, whereas the owners of the aircraft argued that one hundred percent would suffice. See ibid. at 4-5. 131 A fictitious example is used rather than the facts of the Inter Canadian case • given the complicated nature of the case. - 53-
being 150% of the capital claim of each airport divided by two, the • number of aircraft seized by each authority. In either scenario, the total amount of the security to he posted for the release of the aircraft remains the same, $3 million, irrespective of the numher of aircrait seized.
It should be recalled that the total amount of security will vary depending on three factors: (1) the capital claim of the seizing CAA; (2) the rate of interest applicable thereto; and (3) the estimated time at which the debt will he paid. This time factor will in tum depend on the circumstances of the case, including the nature and extent of anticipated litigation, which serves to delay payment. As a result, the Inter Canadian judgment, although illustrative of the method to be applied, does not constitute authority for the proposition that in all cases the amount of security should be one and a half times the capital claim of the seizing authority. Instead, a fiuid approach that takes into account the circumstances of each case is required to determine the amount of security to be deposited under the Airport Transfer Act.
2.3 Release by Court Order
Finally, courts may order the release from detention of aircraft seized by a designated airport authority on grounds other than the posting of security or payment of arrears. Section 9(3) provides in this regard that "[. . .] exempt where otherwise directed by an order ofa court, a designated airport authonty is not required to release from detention an aircraft seized under subsection (1) or (2) unless the amount in
respect of which the seizure \vas made is paid." 132 As drafted, section 9(3) appears to give courts unfettered discretion to consider any factors they deem appropriate in so deciding. It is therefore conceivable that release may be abtained despite the faet that outstanding charges have • nat been paid and that security has not been deposited with the - 54-
authority. To date, no attempt to obtain the release of aircraft in this • fashion has been made. Moreover, the legislative debates are mute on this issue. As a result, little guidance exists as to what factors would justify release under this provision. Nevertheless, in light of the purposes of the Act, it is unequivocal that courts would require proof of sorne overriding consideration of extreme importance totally unrelated to the interests of those parties with rights in the aircrait subject to seizure and detention prior to making such an order for release.
3. Other Remedies
The detention of aircraft is not the only rernedy available to authorities having seized aircrait under the Act. Although not stipulated in the Act, airport authorities benefit from the right, subject ta court authorisation, to sell aireraft they have seized and receive payment in full from the proceeds of the sale and in preference to all other persons. Sirnilarly, in the event that a bond or other security for the amount in respect of which the aircraft was seized is deposited with the authority, they may drawn upon the bond or ather security to the full extent of its claim in capital, interest and costs.
3.1 Sale of Aircraft by Seizing Autharity
The Act makes no mention of the right to sell the aireraft seized in accordance with its terms. Nevertheless, nothing prevents airpart autharities from applying ta the court for permission to sen an aircraft validly seized by them with a view ta exercising their rights.I33 In such a case, they would receive payment in full from the proceeds of said sale and in preference to aIl other persons. 134 Where more than one authority
132 Airport Transfer Act, supra note 1, s. 9(3). 133 See o. Gray, "Aircraft Finance in Canada" (American Bar Association Forum on Air and Space Law, Hotel Omni, Montreal, 3-4 August 2000) [unpublished] at 9. • 134 See Aéroports de Montréal v. Inter Canadian, supra note 89 at para. 60. - 55-
has seized the aircraft, they would likely obtain payment pro-rata to their claim in the event that the proceeds could nat satisfy each claim in • full.135
This proposition was recognised in the only case on point. In the matter of Inter Canadian, discussed in detail below, the Superior Court of Quebec read into the statute a right of sale, subject to court authorisation, where "too much time has passed since the seizure."136 In such a case, the seizing authority may petition the court for leave to sell the aircraft and receive payment in full from the proceeds of the sale in preference to all ather persons. The balance of the sale price would be remitted ta the owners of the aircraft. 137 In Quebec, such sale would take place in accordance \vith the rules of campulsory execution of judgement. 138
3.2 Drawing on Security
In the event that security has been deposited with the selZlng authority in consideration of the release of the aircraft, remedy against such security is also available, the whole in accordance with the terms and conditions of the security instrument itself. For this additional reason it is imperative that careful scrutiny is made of the text of the bond or letter of guarantee. Generally, the conditions which must be satisfied before the seizing authority may draw on the security should be clearly and unequivocally stipulated in the security instrument. The principal condition \vill be that a final judgment on the merits of the
135 See art. 2646(2) C.C.Q.: "If the creditors rank equally, the price is distributed proportionally to their daims, uniess sorne of them have a legal cause of preference." 136 See Aéroports de Montréal v. Inter Canadian, supra note 89 at paras. 78 & 79. In this case, the judge round that payment was to be made within sixty days, failing which the seizing authorities couid proceed to the sale of the aircraft. 137 See ibid. at para 60. 138 See ibid. at conclusions. The mIes of compulsory execution are found at • arts. 640 et seq. C.C.P. - 56-
dispute between the party posting the bond and the seizing airport authority be rendered in favour of the seizing CAA by a court of • competent jurisdiction.
v. Competing Rights in AireraCt: A Practieal Problem
So far, the seizure and detention rights of CAAs have been examined in relative isolation. In practice, however, the rights and interests of airports having seized and detained aircraft often come into conflict with the conventional security interests or ownership rights of third party aircraft financiers seeking remedy against the airerait. In such cases, the competing priorities must be established and ranked and as such is a problem of practical concern. When only conventional security interests are taken into account, the matter of determining rank is difficult, particularly in light of the trans-jurisdictional nature of the problem. When non-consensual rights or interest are added to the equation, the matter is complicated further.
The way in which these competing interests are played out in practice is weIl iIlustrated by an ongoing high profile industry case currently before the courts of Quehec. This case pitches the rights and interests of CAAs and Nav Canada against the ownership rights and security interests of third parties having financed the aircraft subject to seizure, the whole in the context of the bankruptcy of the debtor airline. 139
The facts of the matter are as follows: Inter Canadian, a regional Canadian carrier based in Montreal, ceased operations in November, 1999, due to financial difficulties. A notice of intention to make a proposal was filed in accordance with the Bankruptcy and Insolvency
139 For the judgrnent on the merits in this matter, see Aéroports de Montréal v. • Inter Canadian, supra note 89. - 57-
Act. 140 Prior thereto, however, during the months of approximately September to November, 1999, Inter Canadian solicited and used the • airport facilities and services of a number of Canada's designated airports,141 as weIl as the air navigation services of Nav Canada, and neglected ta pay therefor. Outstanding accounts for navigation and airport services totalled approximately $5 million.
Before Inter Canadian filed its notice of intention, the affected airports and Nav Canada proceeded ta seize and detain Inter Canadian's fleet of sixteen aireraft, most of which were ATR-300s on lease from financial institutions or other financiers. Each aircraft was the subject of more than one seizure by more than one authority. Moreover, ta further complicate matters, at least one seizure before judgment was undertaken byan airerait lessor on an aireraft previously seized by Nav Canada.
After a number of attempts at forging a proposai acceptable ta its many ereditors, Inter Canadian \\'as deemed ta have made an assignment in bankruptey when its proposaI was rejected by creditors in March, 2000. Various parties thereafter asserted eompeting rights in and to the fleet of aireraft formerly operated by Inter Canadian. First, the trustee in bankruptcy, as the successor in interest ta the bankrupt airline, elaimed ta have an interest in the aireraft. Seeondly, the owners and/or lessors of the aireraft asserted a right ta the aircraft opposable as a against all others. Finally, the seizing airport authorities and Nav Canada claimed a preferred right and interest in the aireraft subject to their seizures. The matter of the interplay between these competing rights and interests in
1.;0 See Bankruptcy and Insoluency Act, supra note 62; s. 50.4(1). HI These airports were Aéroports de Montréal; Greater Toronto Airport Authority; St. John's International Airport Authority (Newfoundland), Ottawa Macdonald-Cartier International Airport Authority; Charlottetown Airport Authonty Inc., Greater London International Airport Authority and St. John's Airport Inc. (New • Brunswick). - 58-
the aircrait seized and detained by the airport authorities was therefore • brought before the courts for adjudication. Ta seize the courts of the problemJ the trustee in bankruptcy served on both the ownersjlessors and the airport authorities and Nav Canada notices under section 81(4) of the Bankruptcy and Insolvency Act requiring them to prove their claims in the aircrait by rùing property proofs of claim in prescribed fonn with the trustee within fifteen daysJ failing which the trustee could sel! or dispose of the property free and clear of any lienJ right, title or interest in the property.142 As expected, each aircraft thereafter became the object of more than one property praof of claim, with each seizing airport authority and all the ownersjlessors filing their property proofs of claim to preserve their rights, although the airport authorities objected to the procedure instituted by the trustee. With these competing claims in hand, the trustee then petitioned the Superior Court, sitting in matters of bankruptcy and insolvency, for directions as to which claim to accept and which ta reject.
At the same time, the awnersjlessors applied ta bath the bankruptcy court and the civil courts for declaratory relief under Article 453 of the Code of Civil Procedure of Quebec asking the court ta adjudicate upon the competing rights in the aircraft. They sought orders from the court declaring that the airport authorities and Nav Canada had no right or interest in the aircraft opposable as against the owners/lessors. As a result, they sought permission ta retake possession of the aireraft free and elear of aIl seizures and detentions.
The Superior Court \,·as therefore faeed with a motion for directions instituted by the trustee and motions for declaratory judgment • instituted by the many different aircraft financiers, all of whieh were - 59-
contested in writing by Nav Canada and the numerous CAAs involved in • the matter. In addition, each of the seizing authorities fùed suit against Inter Canadian and, in the case of Nav Canada, against the owners of the aireraft. Ta further complicate matters, the multitude of proceedings upon which the court had to decide, filed in düferent court dockets, were presented in both bankruptcy court and in the civil courts, as the case May be. 143
In a lengthy judgment, 144 the Superior Court, sitting at once in civil matters and in matters of bankruptcy and insolvency, ruled on the competing priorities in the leading judgment on point in Canada. In the process, it considered the nature of the rights and interests of Canada's designated airports in the aircraft subject ta their seizures and detention.
At the outset, the court ruled on the motion for directions instituted by the trustee. In this regard, everything hinged on whether the trustee had any interest in the aircraft. The court found that since none of the aircraft were owned by the bankrupt company, and sinee the aireraft leases and eonditional sales agreements had been resiliated prior ta the bankruptcy, the aircraft were not "property of the bankrupt" within
the meaning of the Bankru.ptcy and Insolvency Act. 145 As sueh, the trustee had no interest in the matter and its motion for directions was dismissed. 146 The deeision of the judge in this regard recognises the true nature of the dispute, that is a dispute between creditors of the bankrupt
14~ See Bankruptcy and lnsoluency Act, supra note 62, art. 81 (4). 143 For a summary of the facts and proceedings, see Aéroports de Montréal v. Inter Canadian, supra note 89 at paras. 1-48. 144 At the very least the twenty-six page judgment was Lengthy by Superior Court standards. See ibid. 145 See Bankruptcy and Insoluency Act, supra note 62, s. 2: '''property' includes money, goods, things in action, land and every description of property, whether real or personal, Legal or equitable, and whether situated in Canada or elsewhere, and includes obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property." 146 See Aéroports de Montréal v. Inter Canadian, supra note 89 at paras. 61-71 & • 165. - 60-
over property belonging to a third party. As sueh, the matter was eompletely outside the bankruptcy. For this reason, the judgment, • although illustrative, does not speeifieally treat the interplay between the rights of a CAA having seized aireraft belonging to a person subsequently having gone bankrupt, and the rights of the trustee in bankruptey.147
The court then tumed its attention to the motions for declaratory judgment and the interplay between the rights of the seizing authorities and the owners of the aireraft. The court found, at the outset, that it was unequivocal that the Airport Trans/er Act confers upon CAAs a right of retention of the aircraft belonging to the debtor airline. 148 Could this
right of retention, howevert be exercised against aircraft not owned by the defaulting carrier? The court held in this regard that it could. 149 In so deciding, the court relied on the text of section 9 itself,150 as wel1 as its conclusion that under the civil law of Quebec, a right of retention could
be exercised against the property of a third partyJ 151 despite the wording of Article 1592 of the Civil Code ofQuebec, which provides as follows:
14ï The principal issue is such a case is whether the seizure would faIl as a result of the bankruptcy. Generally, in bankruptcy attachments and seizures of the bankrupt's property are subordinate to the rights of a trustee, except where such attachments are in favour of a secured creditor. See Bankruptcy and Insoluency Act, supra note 62, s. 70(1). Everything would therefore hinge on whether a seizing CM would be considered a "secured creditor" within the meaning of the Bankru.pt and Insoluency Act. Although this issue was not ruled upon in the matter of Inter Canadian given the court's finding that the aircraft were not property of the bankrupt, the court did find that the seizure of aircraft under the Airport Transfer Act created a '·quasi security interest'· in the aircraft. Such security interest could therefore serve to qualify the seizing creditors as a "secured creditor," where the aircraft are owned by the bankrupt company, in which case the interests of the seizing CM would be opposable as against a trustee in bankruptcy. For the definition of "secured creditor" under the Bankruptcy and Insoluency Act, see Bankruptcy and lnsoluency Act, supra note 62, s. 2(1): ···secured creditor· means a person holding a mortgage, hypothec, pledge, charge, lien or privilege on or against the property of the debtor or any part thereof as security for a debt due or accruing due to him from the debtor, or a persan whose daim is based on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or secondarily liable." 148 See ibid. at para. 91. 14g See ibid. at para. 124. 150 See ibid. at para. 123. • 151 See ibid. at para. 115. - 61 -
A party who, with the consent of the other party, has detention of property belonging to the latter has a right to retain it pending full payment of bis daim against him, if the daim is exigible and is directly • related to the property of wbich he has detention. 152 The court alsa considered whether the right of retention created a lien or security interest over the aircraft. Assimilating the seizure and detention of aircrait under the Airport Transfer Act to the exercise of a right of distress under the common law, the court held that the seizure and detention created a "quasi security" interest over the aircraft. 153 Such security interest survived from the moment of the seizures until payment of the claims of the CAAS.154 In ather words, the court found that the security interest of the seizing authorities secured the whole amount due ta them for unpaid airport charges, not just the portion of charges attributable ta the specifie aircraft subject ta the security interest.155 This finding is supported by the only ather case on point, where the Superior Court ruled as follows:
Attendu que la loi modifiant la Loi relative aux cessions d'aéroports (L.C. 1992, c. 42) permet à [Aéroports de Montréal] de demander à la Cour supérieur l'autorisation de saisir et retenir un aéronef dont la débitrice est propriétaire ou utilisatrice, à défaut de paiement par celle-ci des frais fIXés par [Aéroports de Montréal];
Attendu que le législateur a ainsi voulu garantir le paiement de la créance de[s] [Aéroports de Montréal] dans un pareil cas;
Attendu que le tribunal considère qu'en adoptant l'article 9 du chapitre 42 des lois de 1992, le législateur a voulu faire de la requérante un créancier garanti, au point qu'elle puisse non seulement saisir, mais encore retenir un aéronef;" 156
152 Art. 1592 C.C.Q. 153 See Aéroports de Montréal v. Inter Canadian, supra note 89 at para. 155: "Ainsi le droit de rétention exercé par les parties en décembre 1999 a créé une quasi sureté sur les aéronefs . .. qui s'apparente au 'right of distress' valide jusqu'a ce que les
créances soient payées. Il 154 See ibid. 155 See ibid. at para. 161 & 166. 156 In the Matter of the Proposai of Nolisair Intemational Inc., March 26. 1993, • Q.S.C. 700-11-000069-932. - 62-
Finally, turning to the question of whether the seizing CAAs could • sell the aircraft subject to their seizures, the court relied on the inherent powers and jurisdiction of Superior Courts to rule that the aircraft could be sold if tao much time elapsed following the seizures. 157 The CAAs were therefore authorised to sell the aircrait and receive payment by preference from the proceeds of the sale if they were not paid within sixty
days of the judgment. 158
Not surprisingly, the owners of the aircraft were not satisfied with the judgment at frrst instance and have sinee brought the matter ta appeal. 159 In the interim, most of the aircrait formerly operated by the carrier have been immobilised on the grounds of Dorval International Airport, pending final determination of the ranking and priorities of the competing rights in the aircraft. At least one aircraft, however, was released by a Canadian airport when the aireraft owner acquitted the airline's debt to the seizing airport, a result which reaffrrms in itself the importance of the statutory remedy available to Canadian airports.
The judgment of the Quebec Superior Court in the matter of Inter Canadian eonfirms that the rights and interests of airport authorities in aireraft subject to seizure (1) secure the whole amount due to the authority, in capital and interest; (2) are enforeeable against the aireraft direetly; (3) are opposable as against the owners and/or lessors of the aireraft; and (4) take priority over all other rights and interests in the said aircraft, the whole outside the insolvency of the debtor airline.
Where the aireraft seized belong to an airline having subsequently gone bankrupt, the judgment constitutes authority for the proposition that the seizing CAA is a seeured creditor of the bankrupt company and
15ï See Aéroports de Montréal v. Inter Canadian. supra note 89 at para. 79. 158 See ibid. at conclusions. 159 The appeal is currently pending adjudication before the Quebec Court of • Appeal. A hearing is expected in 2002. - 63-
as such its rights and interests in the aircraft subject to its seizure are • opposable as against the trustee. The right of an airport authority to collect outstanding user fees for airport faeilities and services by way of the remedy of seizure and detention is therefore among the Most robust of the non-consensual interests in aireraft enjoyed by ereditors of an airline, as it should be in light of the public interest and non-profit status ofCAAs.
• - 64-
PART TWO:
• THE MOBILE EQUIPMENT CONVENTION AND A1RCRAFT PROTOCOL
There is little doubt that the air transport industry has undergone dramatic change over the last few decades and this transformation will likely continue. Trends towards privatisation, competition, deregulation and open skies have served ta modernise the industIy at a time of tremendous growth. Aviation specifie trends are not the only ones affecting the industry. Today, progress in the fields of finance, computing and others have influenced the development of air transport, as they have other sectors of activity.
One of the more contemporary trends in aviation IS increased passenger demand for air services resulting from, inter alia, increasing population levels, tourist travel, and an increasingly global workfarce. The challenge naw facing industI")' and gavemment is ta adequately meet this increasing demand for safe, efficient and cost-effective air transport services. Manufacturers must develop different aircraft types in greater
quantity; 160 airlines must expand their capabilities and networks; air navigation services providers must manage mare efficiently already congested airspace, and airports must increase their ability ta effectively accommodate more passengers and flights.
In the face of such demands, industry participants face considerable capital requirements. At the same time, aircraft purchasers often have difficulty in funding acquisitions through internai or equity
160 Boeing and Airbus have recently predicted demand for large civil aircraft in the order of 15,500 to 20,150 units costing US $1.4 trillion, the steepest surge in civil airframe production in aviation history. See Boeing Corporation, 1999 Current Market Outlook (Seattle: Boeing Corporation, 1999); Airbus Industrie, Global Market Forecast • 1999 (1999-2018) (Toulouse: Airbus Industries, 1999). - 65-
financing,161 and governments in Many countries have withdrawn from • providing fmancial assistance thereto. External fmancing has therefore become the comerstone of fleet acquisition, with asset-based transactions forming the bulk of these external fmancing arrangements as they serve to lower the risk and cost of the deal. Where the underlying asset forming the object of a creditor's security interest crosses national boundaries, however, uncertainties arise, particularlyas regards enforcement in the event of default. The possibility that a financier's security interest in collateral moving across jurisdictions May not be recognised and enforced gives rise to significant risk, so much so that sorne lenders have avoided considering such mobile collateral as the
basis for extending credit. 162
Until recentlYt the response of the international aviation community was the Geneva Convention on the Recognition of Rights in Aircraft, currently in force for aver one hundred states. 163 Recently, however, greater demand for capital to finance industry growth has lead to renewed caUs for greater certainty and predictability on the part of financiers.
In the face of this increasing concem over the recognltlon and enforcement of security interests in aircraft, gavernments began over ten years aga fashioning a regime designed to respond ta these calls. These efforts will culminate in the adoption of the Mobile Equipment
161 Even those few airlines with the financial might to purchase aircraft outright would not find it an useful allocation of capital. 162 A. Djojonegoro, "The Vnidroit Proposai for a Uniforrn Air Law: A New Aircraft Mortgage Convention?" (1997) XXll:I1 Ann. Air & Sp. L. 53 at 54. 163 Convention on the Intemational Recognition of Rights in Aircraft, 19 June 1948, ICAO Doc. 7620, 4 U.S.T. 1830, T.I.A.S. 2847, 310 V.N.T.S. 151 [hereinafter Geneva Convention]. Canada is not a signatory ta this agreement and as such it is not • binding thereon. - 66-
Convention and Aircraft Protocol at a Diplomatic Conference in South • Africa later this year. 164 The Unidroit Convention establishes a regime for the recognition and enforcement of security interests in aircraft. It is therefore principallyan instrument concerned with private law rightS. 165 However, its breadth and scope touch upon the statutory public law rights of persons with non-consensual interests in aircraft, such as CAAs. "Should this Convention/Protocol come into force, and Canada ratify same," notes one author, "it will dramatically change [Canadian law governing aircraft liens and detention rightS]."166 For this reason, the treatment of non-consensual rights in the Convention and the interplay thereof with consensual rights is of primordial importance and concern.
Having looked at the nature, scope and extent of the rights conferred upon CAAs by Parliament, this Part of the study examines provisions of the Convention that could impact thereon. It is divided iuto general remarks on the Aircraft Equipment Convention and specifie reasoned comments on articles thereof that merit closer scrutiny.
VI. The Unidroit Initiative
At the outset, it appears that the Convention and Protocol seem to promote and roster without reservation the interests of financiers, the equipment manufacturing industry and air carriers, sometimes at the expense of other legitimate interests of industry participants. The Convention is currently broadly supported and promoted by the leasing
164 See Letter From P. Lortie ta D. Maniatis (26 January 2001). 165 See ICAO, Draft Report ofthe Sub-committee of the [CAO Legal Committee on the Study ofIntemational Interests in Mobile Equipment on the Third Joint Session ofthe Unidroit Committee of Gouemmental Experts, ICAO Doc. LSC/ME/3-WP/39, Unidroit Doc. CGE/lnt.Int/3-WP/39 (2000) at para. 207 fhereinafter Report on the Third Joint Sessionj. • 166 Gray, supra note 9 at Canada-27. - 67-
and fmancing community and related interest groups, the reasons for • which are apparent in light of the history of the initiative and its principal features.
A. Historical Background
The Unidroit project was borne of the initiative of the Canadian government in 1988,167 following the adoption of the Unidroit Convention on Intemational Financial Leasing. 168 Inspiration for the projeet was the desire ta foster global recognition of a finaneial lessor's rights against insolveney administrators and ereditors, and ta treat more elosely issues
surrounding the enforcement of seeurity interests in aireraft. 169
Even sa, it took almost four years for Unidroit to eonelude that the projeet was both usefuI and feasible, at whieh time a Unidroit Study Group \vas established and tasked with the preparation of a draft instrument. The group met a number of times over the years and produced a preliminary draft agreement. At the same time, Unidroit set up an Aireraft Protocol Group eharged with preparing a protocol ta the framework agreement related specifically to aireraft equipment. In 1997, ICAO became aetively involved in the project and his since given priority thereto. 170
167 The proposaI was tabled hy T.S. Smith, Q.C., of Canada, in 1988. For details on the historical background of the project, see L. Clark & J. Wool, ''International Aviation Finance Laws Revisited: A Report on the Development of the Proposed Unidroit Convention on International Interests in Mobile Equipment as Applied to Aircraft" (1998) XXIII Ann. Air & Sp. L. 271; J. Krupski, "Conflict of Laws in Aircraft Securitisation" (1999) XXIV Ann. Air & Sp. L. 91; Djojonegoro, supra note 162. Sorne commentators trace the origins of the Unidroit Initiative to a 1968 United Nations Committee on International Trade Law (Uncitral) decision. See P.S. Larsen & J.A. Heilbock, "Unidroit Project on Security Interests: How the Project Mfects Space Objects" (1999) 64 J. Air L. & Corn. 702 at 721-722. 168 Unidroit Convention on Intemational Financial Leasing, 20 May 1988, 27 LL.M.931. 169 See Djojonegoro, supra note 162 at 54. • 170 See Krupski. supra note 167 at 97-99. - 68-
In 1994, the aircraft manufacturing industry, recognising that the project represented a unique opportunity to foster its commercial • interests, became actively involved the matter through the Aviation in Working Group (AWG) , a group aIso made up of financiers and leasing companies. Ever since, with the active support of IATA, the project has been guided almost uniquely and entirely by the interests of the leasing
and fmancing community and related groups. 171
Canadian experience with the project has been no different. Industry participation ln the Canadian consultation process, for example, has been sa far limited to those groups with the most to gain from the Convention/Aircraft Protocol. 172 Moreover, the question of the impact of the proposed regime on the rights of Canadian airports to seize and detain aircraft has not been considered in the context of the consultations that have taken place in Canada on this matter. Although certain references may be found in the consultation materials, no substantive discussions were engendered. Perhaps more importantly, no real discussion of the impact of the whole on the rights on any preferred non-consensual creditor has been initiated. These remarks are not
171 The AWG is the most active interest group involved in the preparation of the Unidroit Convention. In fact, members of the AWG or their advisors have participated in most important committees treating the issue, including the Aircraft Protocol Group. 1ï2 So far, five rounds of public consultation have taken place in Canada. For the results of these rounds, see Canada, First Consultation Package to the Attention of Interested Canadian authorities, Industries and Practitioners on a Draft Convention on International Interests in Mobile Equipment and a Draft Protocol on Matters Specific to Aircraft Equipment (Ottawa: Department of Justice, 1998) [hereinafter First Consultation Package]; Canada, Second Consultation Package to the Attention of Interested Canadian authorities, Industries and Practitzoners on a Draft Convention on International Interests in Mobile Equipment and a Draft Prolocol on Matters Specific to Aircraft Equipment (Ottawa: Department of Justice, 19991 [hereinafter Second Consultation Package]; Canada, Third Consultation Package lo the Attention of Interested Canadian authorities, Industries and Practitioners on a Draft Convention on International Interests in Mobile Equipment and a Draft Protocol on Afatters Specific ta Aircraft Equipment (Ottawa: Department of Justice, 1999) [hereinafter Third Consultation Package]; Canada, Fourth Consultation Package to the Attention of Interested Canadian authorities, Industries and Practitioners on a Draft Convention on International Interests in Mobile Equipment and a • Draft Protocol on Matters Specific to Aircraft Equipment (Ottawa: Department of Justice, - 69-
intended to diminish the industry contributions so far made or the efforts of those behind this initiative, but simply to highlight the reality of • the consultation process and international experience to date.
B. Principal Features
What has become known as the Unidroit Convention is for the moment composed of two separate legal instruments: a framework Mobile Equipment Convention and an Airport Protocol. Although suchconvention/protocol structure is envisioned at this time, the final structure of the Unidroit convention has not yet been determined. A single instrument may therefore be adopted instead. It would appear that this question will be settled at the Diplomatie Conference called for
later this year ta adopt the instruments. 173
Whatever the final structure, the objective of the Unidroit Initiative is to establish a framework for the creation and effects of an international interest in high-value uniquely identifiable mobile equipment, including aireraft, satellites and other space objects, and railway rolling stock. Such a framework, designed to facilitate eross border asset-based financing and leasing by decreasing the risk and eost thereof, is expeeted to provide signifieant economie benefits to contraeting states, ineluding Canada, where the aerospace sector is an integral component of the national eeonomy. Commercial aireraft manufacturers, aviation industry investors, governments and airlines appear to he the primary heneficiaries, although the travelling public
2000) [hereinafter Fourth Consultation Package]; Fifth Consultation Package, supra note 4 . 173 For Canada's position on the structure of the instruments and the issues related thereto, see Government of Canada, "Canada's Position With Regard to the • Convention/Protocol Structure," in Fifth Consultation Package, ibid. at Tab 7. - 70-
may aIso benefit by way of pass-through savings on the price of • transportation. 174 To achieve these benefits, the Convention/Aircrait Protocal attempts to harmonise the lawapplicable to security interests in aircraft in a number of ways: First, it establishes rules for the constitution and effects of "international interests" in aircraft equipment.175 Such interests are rights in an object conferred by a debtor to guarantee payment of a debt, such as for example a security interest under a movable hypothec. Although they are created under the domestic law of signatory states, they must meet certain internationaIly recognised criteria to qualify as international interests under the treaty.176 Secondly, an international registry will aIso be established to publish interests in aircraft. 177 Registered interests will rank on the basis of the first in time mIe, subject, however, ta the priority of preferred non consensual creditors. 178 Thirdly, the Convention creates an extensive set of remedies available to secured creditors in the event of default.179 To the extent agreed upon by the transactional parties, these remedies include taking possession of the aireraft, selling it, collecting incarne from
174 For somewhat partisans studies on the anticipated benefits of the Unidroit Convention, see T. J. Gallagher, "Assessment of the Anticipated Economie Benefits of the Unidroit Convention" (1998) XXIII:6 Air & Sp. L. 294; A, Saunders & L Walter, "Proposed Unidroit Convention on International Interests in Mobile Equipment as Applicable ta Aircraft Equipment through the Aircraft Equipment Protocol: Economie Impact Assessment" (1998) XXIII:6 Air & Sp. L. 339. These studies were commissioned by the AWG. 1i5 See Mobile Equipment Convention, supra note 4, art. 2 & 6. 176 See ibid., art. 6: An inrerest is constituted as an mternational interest under this Convention where the agreement creating or provldmg for the interest: (a) is in writing; (b) relates ta an abject of which the chargor, conditional seller or lessor has power to dispose; (c) enables the object to be identified in canformity with the Protocol; and (d) in the case of a security agreement, enables the secured obligations ta be determined, but without the need to state a sum or maximum sum secured. 177 See Mobile Equipment Convention, supra note 4, chap. IV. 178 See ibid., arts. 28 & 39. • 179 See ibid., chap. III. - 71 -
its use or de-registering and exporting it. 180 Where the parties sa agree, • these remedies may he exercised without judicial authorisation and as such constitute self-help remedies. Contracting states, however, may opt out of the provisions deaJing with self-help remedies. Finally, the Convention provides that an international interest and remedies available to holders thereof shall he enforceable in the context of insolvency proceedings, subject to national procedural mIes. Under optiona1 provisions of the Convention, however, the debtor or insolvency administrator would be required to eure all defaults vis-à-vis the creditor within a time frame determined by the contracting state. Moreover, the exercise of Convention remedies cao not be prevented or delayed after that time period.
The foregoing principal features of the Aircraft Equipment Convention illustrate a thrust favouring asset-based fmancing. 181 At the same time, the features and the history of the project raise prima facîe concern that the Convention/Aireraft Protocol does not adequately protect the rights and interests of non-consensual creditors whose interests, as seen above, are most often at odds with those of aircraft financiers. Whether this concem is borne out in the instruments is examined below.
180 See ibid. 181 See G. Lauzon, Report of the Rapporteur to the [CAO Legal Committee on lntemtaional Interests in Mobile Equipment (Aircraft Equipment), ICAO Doc. Lei31 WP13-4 (2000) at 4 [hereinafter Report of the Rapporteur]. This report may also be • found at Fifth Consultation Package, supra note 172 at Tab 5. -72 -
VII. Mobile Equipment ConventionlAireraft • Protocol Against the baekdrop of these general remarks, specifie provisions of the clraft Convention and Airerait Protoeol touehing upon non consensual rights are considered below. Given that the Convention and Protocol are to be read and interpreted together as a single instrument,182 both instruments have been considered together.
A. Chapter 1 of the Convention - Interpretation and Applicable Law
The interpretation of agreements, whether national or international, is an essential and necessary element of their application. In courts of law, where so many commercial disputes end up, the outcome often depends on the interpretation of one sometimes seemingly innocuous word or phrase. For this reason, matters affecting the interpretation of the Aircraft Equipment Convention in contracting states require particular attention as the rights and obligations of those subject ta its terms may vary accordingly, sometimes in ways unexpected by the drafters and signatories thereof.
International law on treaty interpretation is clear and well established, both in custam and treaty. The Vienna Convention on the Law of Treaties provides that treaties are interpreted in good faith in accordance with the ordinary meaning of the terms and their context and in the light of their object and purposes. The context is determined by reference to the text of the treaty, as weIl as to its preamble and annexes. Other relevant factors inciude any subsequent agreement regarding the interpretation of the treaty, subsequent state practice, other rules of
• 182 See Mobile Equipment Convention, supra note 4, art. 47(2). -73 -
international law, the prepatory work and the circumstances of its • conclusion.183 Article 5 of the Unidroit Convention, dealing with the interpretation thereof, surprisingly codifies anly partially the international law of treaties and specifies only a certain number of elements to he considered in the interpretation of the agreement. Whether such an approach serves to obviate the other elements of the Vienna Convention is open for debate. Without engaging in this debate, suffice it to say that to the extent that the draft Convention is lex specialis, its mIes wouid take precedence over corresponding or analogous rules of more general application.
1. Preamble
In any case, according to Article 5( 1) of the Convention, regard is to be had ta, inter alia, the purposes of the Convention as set forth in the preambIe. 184 The preamble ta the latest draft contains six clauses, each of which speaks ta the interests of financiers, the equipment manufacturing industry and airlines, the whole as more fully appears below:
THE STATES PARTIES TG THIS CONVENTION,
AWARE of the need to acquire and use mobile equipment of high value or particular economic significance and to facilitate the financing of the acquisition and use of such equipment in an efficient manner,
RECOGNISING the advantages of asset-based fmancing and leasing for this purpose and desiring to facilitate these types of transaction by establishing clear mIes to govern thern,
MINDFUL of the need to ensure that interests in such equipment are recognised and protected universally,
18J See Vienna Convention on the Law of Treaties, 23 May 1969, 1155 U.N.T.S. 331 arts. 31 & 32. • 184 See Mobile Equipment Convention, supra note 4, art. 5(1). -74 -
DESIRING to provide broad economic benefits for aIl interested parties,
BELIEVING that such mIes must reflect the principles underlying asset • based financing and leasing and promote the autonomy of the parties necessary in these transactions,
CONSCIOUS of the need to establish a legal framework for international interests in such equipment and for that purpose to create an international registration system for their protection, 185
Examination of the prepatory materials reveals that the sole preambular clause illustrating that contracting states are conscious of interests other than those of equipment financiers was deleted during the Third Joint Unidroit-ICAO Session held in April, 2000. Said clause read as fallows:
RECOGNISING that a Convention on asset-based financing must allow Contracting States the flexibility to make special declarations under the Convention conceming matters affecting important national policies;
In light of the importance of the preamble ta the interpretation of the entire agreement, it is unfortunate that this clause was deleted. It served the interests of many as it at least partially redressed an obvious imbalance of the entire regime in favour of financiers.
Article 5(1) also provides that in the interpretation of the treaty specifie regard is to be had to the intemational character ofthe treaty and
the need to promote uniformity and predictability in its application. 186 Although not prima facie prejudicial to the interests of airport authorities and other non-consensual creditors, these two elements not quite customary in the circumstances are designed to promote the Unidroit regime and the principles underlying it over incompatible domestic legal rules. In Canada, fe\\O conflicts between the two may be envisioned as regards consensual security regimes. At the same time, however, Canadian courts will very likely be called upon to mIe on the relative priority between non-consensual creditors with rights in the abject and
l85 Ibid., preamble. • 186 See ibid., art. 5(1). - 75-
consensual creditors secured by way of the treaty. In the process, recourse will surely be had to the provisions of the Convention governing • its interpretation. It would appear that the playing field has been slanted in favour of aircraft financiers even before the game has begun. Whether such a bias is ultimately heneficial to the public interest in encouraging investment in aireraft, or whether such ultimately prejudices it by restricting the ambit of recourses against the aircraft thus financed, is a matter for debate beyond the scope of this study.
2. Article 5(2) of the Convention - General Principles Underlying the Uniciroit Regime
Another element prejudicial to the interests of CAAs and other non-consensual creditors is Article 5(2) of the Convention, which provides as follows:
Questions concerning matters govemed by this Convention which are not expressly settled in it are to be settled in conformity with the general principles on which it is based or, in the absence of such principles, in conformity with the applicable law. 187
ln other words, signatory states undertake ta settIe all questions concerning the subject matter of the Convention in accordance with either the Convention, if they are expressly deait with by it, or in accordance with the principles underlying it where such questions are not expressly dealt with by the text of the agreement. These principles, different from the purposes set forth in the preamble, are now incorporated into the treary structure by reference. Only where no such principles may be discerned would applicable law prevail. The rationaie underlying this provision appears to be that the principles underlying the treaty should serve ta settle aIl issues or questions conceming the matters governed by the Convention, whether such matters are expressly settled by the Convention or not.
• 187 Ibid.• art. 5(2). -76 -
Although the principles underlying the treaty appear nowhere therein in explicit language, review of the prepatory materials reveals • that the treaty regime is based on the three fundamental principles underlying asset-based fmancing itself: First, the transparent priority principle provides that a financier must be able to determine with certainty the relative priority of its security in a financed asset in light of potenrial competing claims in rem against the asset. This principle is given effect in the treaty by way of the first to fùe ranking of competing property interests, as well as by the requirement that non-consensual interest be declared by a contracting state for them to rank in the asset. Second, the prompt enforcement principle encompasses the ability ta promptly enforce rights against the secured asset for purposes of generating proceeds to mitigate damages and set off against the underlying debt. The treaty contains variaus basic and optional expedited remedies designed to implement this principle. Third, the bankro.ptcy law enforcement principle consists of the ability to enforce secured rights and remedies against the asset in the context of bankruptcy or insolvency proceedings. 188 The Convention contains in this regard an optional provision designed to give effect to this principle.
Combined, Article 5(2} of the draft agreement and the principles on \vhich it is based serve to slant all questions not explicitly settled by the Convention in favour of financiers. Given that it is arguable that the interplay of declared non-consensual rights or interests with consensual interests registered under the treaty is not explicitly settled by the Convention,189 Article 5(2} gives rise to the possibility that the nature, scope and extent of the right of Canadian airport authorities to seize and detain aireraft, where such right is in conflict with an international
188 For a discussion of these principles, see Lauzon, supra note 181 at para. 23. 189 As discussed at Section VII-B below, the Unidroit Convention does treat to a certain degree non-consensual rights and interests. Nevertheless, as will be seen, it • does not treat all issues or questions related thereto. - 77-
interest registered under the treaty, would he interpreted by Canadian • courts at least partly in light of the principles of the draft Convention. Such an outcome would be unacceptable as contrary to existing principles of Canadian statutory interpretation. The approach envisioned by Article 5(2) is therefore objectionable on various grounds, not the least of which is that a number of these principles may not even find application in practice as states retain the option to opt out of provisions dealing with prompt enforcement and bankruptcy law enforcement. Despite the fact that they so opt out, however, the very principles from which they are opting out could be used ta settle questions not expressly settled by the Convention itself. Applicable law should be the residual substantive law, not the principles of asset-based financing.
B. Chapter X of the Convention - Non-consensual Rights and Interests
The central provisions of the Aireraft Equipment Convention dealing with non-consensual rights are found at Chapter X of the Unidroit Convention and build on the transparent priority principle by ensuring that non-consensual rights or interests are brought ta the attention of the international financing community. The Convention allows state parties to ensure the recognition of non-consensual rights by \vay of a declaration that can be made at any time. Such declarations shaH target non-consensual interests which faU inta one of two categories: those that will require registration to have any priority vis-à• vis international interests and those that will not. As drafted, the convention provides that a registered international interest enjoys • -78 -
priority over an unrecorded or a subsequently recorded non-consensual • interest, unless those interests don't have to be recorded. 190 The inclusion of these provisions illustrates a legislative recognition that the international regime should reflect existing domestic priorities between consensual and non-consensual interests in aircraft. Whether it effectively does so is another question and the central focus of the discussion that follows.
1. Article 38 oC the Convention - Registerable Non-consensual Rights and Interests
Article 38 broadens the scope of the Convention by permitting contracting states to designate certain categories of non-consensual rights that may be registered as international interests under the treaty, \\'hich interests would thereafter he treated as such for priority purposes. Article 38 provides that:
A Contracting State may at any time in a declaration deposited with the depositary of the Protocol üst the categories of non-consensual right or interest which shall be registrable under this Convention as regards any category of object as if the right or interest were an international interest and be regulated accordingly. Such a declaration May be modified from time ta time. 191
Non-consensual rights or interests the object of such declarations are called "registerable non-consensual rights or interests."192 Typical declarations hereunder will include judgment creditors in execution, as the security interest granted to these creditors generally ranks under domestic law according ta its date of registration. 193
This provision covers non-consensual rights or interests that would take their place in the ranking scheme of the Convention as ofthe date of
190 See Lauzon, supra note 181 at para. 140. 191 Mobile Equipment Convention, supra note 4, art. 38. 192 See ibid.• art. l(dd). • 193 E.g., art. 2945(1) C.C.Q. - 79-
their registration. As sueh, international interests take priority over unreeorded or subsequently reeorded registerable non-eonsensual rights • 194 or interests.
A deelaration made by Canada in favour of CAAs under this provision would effectively compromise the rights eonferred upon them by the Airport Transfer Act. Under Canadian domestie law, the seizure and detention of aireraft under the Aet does not require registration to establish its priority. In faet, registration of sueh interests is arguably not even possible.195 As discussed in Part One above, the rights and interests of airport authorities in airerait subjeet ta seizure are opposable as against all persons, ineluding the owners and/or lessors of the aireraft, and take priority over all other rights and interests in the said aireraft, even those seeurity interests registered prior ta the seizure and detention.
A deelaration under Article 38 would ehange this situation given that the rights of a seizing authority would no longer rank in priority to all other rights and interests in the aireraft, but only in priority to those interests registered under the treaty after the date on which the seizure was registered. The seeurity interest of an aireraft financier would therefore trump the interests of an airport authority having seized and detained the aireraft for unpaid airport charges given that the seeurity interest would have been previously registered at the time of the granting of the seeurity. It is therefore imperative that no deelaration he made by
194 See Lauzon, supra note 181 at para. 140. 195 It would appear that certain modifications to the Airport Transfer Act are being considered at this time to permit the registration of seizures and detentions undertaken in accordance \\ith its terms, the whole in contemplation of the entry into force of the Unidroit regime. The idea is that the Act would he amended as required to a110w a dec1aration to be made by Canada under Article 38 of the Convention. Such an approach, however, would effectively alter the nature and scope of the rights currently conferred upon CAAs. Interview with D. Gray (27 April 2001) [hereinafter Gray • Interviewl· - 80-
the Govemment of Canada in favour of CAAs under Article 38 of the • Convention. 2. Article 39 of the CODventioD - Preferred Non-coDseDsual Righu aDd IDterests
Article 39, on the other hand, deals with non-eonsensual interests that would have priority under national law over the local equivalent of an international interest. It makes the giving of such priority over a registered international interest dependant on that state setting out that priority in a diplomatie instrument deposited with the appropriate international authorities. This priority accorded to so-ealled preferred non-eonsensual rights or interests over registered interests constitutes the one exception to the first to file mIe of the treaty. Aecording to its terms:
(1) A Contracting State may at any time in a declaration deposited with the depositary of the Protocol declare, generally or specifically, those categories of non-consensual right or interest (other than a right or interest to which Article 38 applies) which under that State's law would have priority over an interest in the object equivalent to that of the holder of the international interest and shall have priority over a registered international interest, whether in or outside the insolvency of the debtor. Such a declaration may be modified from time to time.
(2) A declaration made under the preceding paragraph may be expressed to cover categories that are created after the deposit of that declaration.
(3) An international interest has priority over a non-consensual right or interest of a category not covered by a declaration deposited prior to the registration of the international înterest. 196
In substance, Article 39 creates a notification system for non-consensual security interests, thereby providing financiers with the certainty of knowing that their secured rights may be trumped only by those declared non-consensual rights or interests. This approach has met with sorne approval. According to one analyst:
• 196 Mobile Equipment Convention. supra note 4, art. 39. - 81 -
It will also improve access ta up-dated information on foreign laws. Cauntries May guarantee the arder of a creditor's preference in the way that they believe most canvenient. At the same time, foreign creditors • have better information ta analyse their position in relation ta ather rightS. 197
If a declaration is made by Canada under Article 39 in favour of designated airport authorities, the seizures and detentions effected thereby in virtue of the Airport Transfer Act would appear to take priority over interests registered under the treaty. The Article 39 priority of declared non-consensual interests over registered interests would be binding on and applicable to non-declaring contracting states in their relations with the declaring state. In other words, the lack of a reciprocal declaration by astate does not compromise the protection afforded ta a non-cansensual interest declared under Article 39 by a particular state. 198
In light of the foregoing, it is of fundamental importance that a declaration under Article 39 be made in favour of Canadian airports. At the time of writing, however, it would appear that the Government of Canada's position as regards declarations of non-consensual rights or interests is that to the extent possible declarations should be made under Article 38, not Article 39. 199 The advantage of Article 38 declarations is that such a non-consensual right or interest gets incorporated into the priority and registration system of the Convention. Aircraft financiers will simply need to conduct a registry search to determine whether any non-consensual rights have attached to the aireraft. As such, the system provides everyone involved with a high degree of predictability. On the other hand, Article 39 rights or interests
197 T.P. Rodriguez, "International Regulation of Interests in Aireraft: the Brazilian Reality and the Unidroit ProposaI" (2000) 65 J. Air L. & Corn. 279 at 309-310. 198 See Unidroit Convention art. 54(3): "The provisions of this Convention subjeet to any reservation or declaration shaH be binding on the Contracting States that do not made sueh reservations or declarations in their relations vis-à-vis the reserving • or declaring Contraeting State." - 82 -
do not require registration to trump the interests of an aircraft fmancier. The more declarations made under Article 39, the less certainty afforded • ta lenders as their interests may be subordinate ta these preferred non consensual interests.
The current state of Canadian law is such that the rights and interests of CAAs in the aircraft subject ta their seizures take priority over registered consensual security interests.200 As a result, Article 39 should find application. It is not up ta the executive ta change the priority afforded ta CAAs by Parliament.
Such a deelaration should make specifie reference ta the Airport Transfer Act and the Aeronautics Act, as weIl as to the article of the Convention under which the declaration is being made. The Govemment of Canada should make a declaration in the following approximate terms:
Canada hereby declares the following categories of non-consensual rights or interests pursuant ta Article 39 of the Convention:
AIl rights and interests conferred upon designated airport authorities by virtue of the Airport Transfer Act, as amended, or any act in replacement thereof, including, without limitation, the right to seize and detain aircraft.
AIl rights and interests conferred upon the Minister of Transport or such other minister as is designated by the Governor in Council as the Minister for the purposes of the Aeronautics Act, by virtue of the Aeronautics Act, including, without limitation, the right to seize and detain aircraft.
If no declaration is made by the Govemment of Canada under Article 39, the rights of Canada's designated airport authorities to seize and detain aireraft will be severely eompromised as the rights of seeured creditors having registered their security under the treaty would take priarity over a seizure undertaken by a designated airport authority.
19q Gray Interview, supra note 195. • 200 See Section IV-B above. - 83-
This protection afforded to non-consensual secured creditors by the draft Convention therefore depends on the ability of a state ta make a • declaration under Article 39. To avoid the possibility that financiers attempt to circumvent this protection by arguing that a particular declaration was not valid because it did not concern a non-consensual right or interest, as defined by the treaty, the following provision should be included in the agreement:
The dec1aration of a particular category of rights and interests under Articles 38 and 39 shall be at the complete and unfettered discretion of the Contracting State making such declaration.
[n this fashion, additional protection is afforded to declared non consensual secured creditors without compromising the legitimate priority of registered interests and with the additional benefit of added predictability for the system as a whole.
Regarding the timing of a declaration made by the Canadian Government under Article 39, it would appear that Article 39(3) may give rise to certain problems and perhaps unintended consequences. According thereto, a declared non-consensual interest would have priority only over international interests registered after the date on which the declaration was made. In other words, international interests registered prior ta the date on which Canada makes a declaration would usurp non-consensual rights or interests of the declared category.
Depending on the date on which Canada makes a declaration under Article 39, Article 39(3) may seriously prejudice the ability of designated airport authorities to collect airport charges as seizures and detentions of aircraft the abject of an international interest registered prior to date of Canada's declaration would not necessarily trump that • interest. [t is therefore imperative that the Government of Canada make - 84-
a declaration under Article 39 in favour of Canada's airports at the latest • before the ume ofits entry into force for Canada. Certain commentators and groups remain opposed to Articles 38 and 39 of the Convention on various grounds. üthers have proposed that contracting states be given the possibility of opting out of these provisions.201 Although it would appear that these voices have waned, vigorous defence of these provisions is required as the ability of Canada's airports, not ta mention its air navigation services provider, ta effectively colleet charges depends on it.
c. Article 1(8) of the Convention - Dermition of "Non-consensual Right or Interest"
The extent to which the draft Convention governs, at least in part, the rights of Canadian airports to seize and detain depends on the definition of "non-consensual right or interest," and whether same encompasses the rights conferred upon Canada's airport authorities by the Airport Transfer Act. Under the draft Convention, as proposed, a contracting state may declare those categories of non-consensual rights or interests which shaH have priority over international interests registered under the Convention.202 It would appear, however, that contracting states may only make declarations concerning non consensual rights or interests defined as such, as opposed ta rights and interests it considers to be non-consensual. The definition of non consensual right or interest therefore serves to limit the scope of possible declarations made under the Convention.
201 See ICAO t Report of the Unidroit Committee of Govemmental Experts on the
Second Joint Session, ICAO Doc. LSC/ME/2-Reportt Unidroit Doc. CGE/lnt.Int/2 Report (1999) at para. 5:33 [hereinafter Report on the Second Joint Session). 202 Mobile Equipment Convention, supra note 4, art. 39. For a detailed • discussion of these provisions of the Convention, see Section VII-B-2 above. - 85-
The ciraft Convention dermes a "non-consensual right or interest" as lia right or interest eonferred by law to secure the performance of an • 203 obligation, including an obligation to a State or State entity." As drafted, declarations under Chapter X of the Convention may therefore only be made as regards rights or interests conferred by law to secure the perfonnance of an obligation. Although it was argued at Part One above that the right to seize and detain aireraft for unpaid airport user fees is a right conferred by law to seeure the performance of an airline's payment obligation,204 the lack of incontrovertible legal authority on point gives rise ta a unaeceptable degree of uncertainty prejudieial to the interests of Canadian airport authorities.205
For the foregoing reasons and for greater certainty, consideration should be given ta broadening the definition of non-eonsensual right and interest ta ensure without doubt or uncertainty that the right of Canada's designated airport authorities ta seize and detain airerait faIls squarely within its terms. One outside commentator concurs. He writes that "these stipulations [dealing with non-consensual interests] should be interpreted or clarified to include those [non-consensual] charges that
contracting states levy (...],"206 including, for example, airport user fees levied byairports. The following definition is therefore proposed:
"Non-consensual right or interest" means a right, privilege or interest conferred by law to secure the performance of an obligation, including an obligation to a State or State entity, and includes a right conferred br law ta seize. detain or sell the object. whether such abject is owned by the debtor or not.
203 See ibid., art. 1(sI. 204 See Section (v·B above. 205 As discussed above, the controlling case on point is now subject to appeal. See Section Vabove. • 206 J. Krupski, supra note 167 at 149. - 86-
It would appear that a similar amendment was proposed by at least one • delegation during the Third joint Session.207 Articles 38, 39 and l(s) of the Aircraft Equipment Convention are the only ones treating non-consensual rights and interests specifically. Nevertheless, other substantive provisions of the Convention could have an adverse impact on the seizure and detention rights of CAAs. The principal such provisions are examined below:
D. Chapter ID of the Convention • Articles IX, X and XIII of the Protocol - Default Remedies
The Convention/Protocol provides for an extensive set of remedies available to creditors in the event of default by their airline debtor, including the ability to immobilise, take possession, sell or redeploy, take
in payment, de-register from national registries and export aireraft.208 In sorne cases, interim remedies are also available pending final adjudication on the merits, sometimes on an expedited basis.209 Moreover, remedies may be exercised without court authorisation, depending on the jurisdiction in which the remedies are sought to be exercised.210 According to one commentator, "the remedies available [under the Convention) basically reflect non-judicial, self-help remedies available under the common law, thus affirming the commercial interests of larger air-faring States and the devices essential to safeguarding
.207 See ICAO. Draft Report of the Sub-committee ofthe ICAO Legal Committee on the Study ofIntemational Interesls rn Afobile Equipment on the Third Joint Session ofthe Unidroit Committee of Gouemmenral Experts, ICAO Doc. LSC/ME/3-WP/39, Unidroit Doc. CGE/lnt.lnt/3-WP/39 (20001 at para. 208 [hereinafter Report on the Third Joint Sessionl· 208 See Mobile Equipmenr Conuention, supra note 4, chap. III; Aircraft Protocol, supra note St chap. Il. It should be noted that the de-registration and export of an aireraft is not a remedy per se, but a means designed ta ensure that certain remedies may effectively be carried out. 209 These remedies inc1ude taking possession, custody and control over the aircraft. See Mobile Equipment Conuention, ibid., art. 12. • 210 See ibid., art. 52(2). - 87-
creditor interests."211 They are recognised to be of capital importance as they respond to the need for rapid and cost effective enforcement, a • characteristic of asset-based financing.212
The convention distinguishes between the remedies available to the different types of creditors in aircraft fmance transactions: the chargee under a security agreement, the conditional seller under a title reservation agreement and the lessor under a lease or sub-lease.213
1. Articles 7 aDd 8 of the ConveDtion and Article IX of the Protocol - Remedies ofthe Chargee
Article 7 of the Convention, dealing with the remedies of a creditor secured by way of a security agreement214 provides that upon default215 the secured creditor, called a chargee under the Convention, rnay take possession or control of the aircraft, sell or grant a lease of it, collect any incorne or profits arising from the management or use of the aircraft.216 Under the Protocol, the chargee rnay also procure the de-registration of the aircraft and export it, subject to the consent of any higher ranking registered interests.217 State parties are required ta declare whether these remedies may be exercised with or without court authorisatian.218
A chargee praposing ta exercise the rernedies of sale or lease othenvise than pursuant to court order must give reasonable notice in
211 See Krupksi, supra note 167 at 143. 212 See Lauzon, supra note 181 at para. 63. 213 See ibid. at para. 64. 21'; A security agreement is defined as "an agreement by which a chargor grants or agrees to grant a chargee an interest (including an ownership interest) in or over an abject to secure the performance of any exi!ating or future obligation of the chargor or a third person." See Mobile Equipmenl Conuention, supra note 4, art. l(ii). 215 What constitutes a default is subject to the agreement of the transactional parties. In the absence of such contractual terms, default means "substantial default." See ibid., art. 10. 216 See ibid., art. 7( 1J. 217 See Aircraft Prococol, supra note 5, art. IX(l) & (2). • l18 See Mobile Equipment Convention, supra note 4, art. 52(2). - 88-
writing of the proposed saie or lease to interested persons.219 "Interested persons" are defmed to be the debtor,220 any person who grants to the • ereditor any form of credit insurance to guarantee the performance of any of the debtors obligations in favour of the creditor, such as a guarantor or surety,221 and "any other person having rights in or over the aireraft."222 However, where the interested persan faIls into this latter eategory, that is "any other person having rights in or over the aireraft," such notice is only required when that persan has given notice of its rights ta the chargee within a reasonable time prior to the sale.223
Given that CAAs having seized and detained aireraft faU into this latter category of interested persons, they would only receive notice if they had previously given notice of their rights to the secured party wishing ta exereise remedies over the aireraft. As a result, this provision imposes upon seizing CAAs an additional burden, that of notifying all parties having previously registered an international interest against the aircraft. Where international interests are registered after the seizure and detention of the aireraft, however, problems ean arise. In sueh cases, it would appear that the chargee having subsequently registered its interest would he in a position ta exereise its remedies against the aireraft without notice ta the seizing CAA. Sueh an outcome is elearly inconsistent with the rights conferred upon CAAs by the Airport Transfer Act. Irrespective of the notice issue, however, is the fact that as drafted the Convention appears ta authorise a chargee to exercise remedies against aireraft inconsistent \\'ith a seizure and detention undertaken by aCAA.
219 Ibid., art. 7(3). 220 Ibid., art. 1(m)(i). 221 Ibid., art. 1(m)(ii). 222 See ibid. 1(m)(iii). • 223 See ibid., art. 7(3)(b). - 89-
2. Article 9 of the Convention - Remedies of the CODditioDal Seller or Lesaor • The remedies available to a eonditional seller or lessor are much simpler and are predieated on the fact that both of these ereditors are the actual owners of the aireraft. The Convention provides that upon default, a conditional seller or lessor may resiliate the agreement and take possession of the aircraft.224 In sorne case, court authorisation may be required before these remedies can be exercised.225 De-registration and export may also be available in aecordance with the terms of the Protocol. Once again, however, these remedial provisions of the Convention/Protocol do not adequately consider if and how such remedies may he exercised over an aircraft subject to seizure and detention by a CAA.
3. Article 12 of the Convention and Article X of the Protocol Interim Relief
Pending adjudication on the merits, interim relief may be available ta the conditional seller, lessor or chargee. Such relief includes preservation of the aircraft and its value, taking possession, control or custody of the aircraft, immobilisation, Iease or management of the object and incorne therefrom and sale of the aircraft.226 The debtor must have consented to the application of the rules on interim relief, which relief can only be granted by a court.227 Contracting states to the Convention/Protocol rnay opt out of these provisions in whole or in
part.228
As drafted the Convention/Protocol grants remedies ta creditors that are incompatible with seizures and detentians undertaken by virtue
~24 See ibid., art. 9 (1). 225 See ibid., art. 52(2). 226 See ibid., art. 12; Aircraft Protocol, supra note S, art. X. 227 See Lauzon, supra note 181 at paras. 71 et. seq. • 228 See ibid. - 90-
of the Airport Transfer Act without providing for the manner in which these incompatibilities will be settled. The interplay between these • provisions of the ConventionfProtocol and the rights of declared preferred non-consensual creditors is not readily apparent and should he clarified. On the other hand, the interplay between registered creditors and the exercise of remedies thereby is treated, at least partially. Article IX(2) of the Protocol specifically provides that a creditor may not de register and export aircraft without the prior consent of the_holder of a registered interest ranking in priority to that of the creditor.229 What happens, however, if the aireraft at issue is the subject of a seizure and detention bya declared preferred non-consensual creditor? Can sueh an aireraft be de-registered and exported without the seizing airport's consent? As drafted, the answer to these questions is unelear, thereby giving rise ta uncertainty and unpredictability detrimental ta both non eonsensual and eonsensual ereditors.
Other uncertainties plague the remedial provisions of the ConventionfProtacol. Can default remedies be exereised against a seized aireraft without notice to the seizing airport authority? Can an aireraft subjeet to seizure and detention be sold without the consent of the seizing airport? In view of the uncertainty surrounding these issues, the matter should be treated specifically in th.e Convention such that it is elear that no remedy may be exercised by a consensual creditor under the treaty that is incompatible \~,rith or which compromises a seizure and detention effected by a Canadian airport authority without its consent.
E. Article 28 of the Convention - Priority of Competing Interests
A central provision of the draft Convention is Article 28, which implements in part the transparent priority principle. It explicitly specifies the relative priority of campeting interests, embodying the first
• 229 Aircraft Protocol, supra note 5, art. IX(2). -91-
to fùe roIe, whereby the frrst persan to register an interest will have • priority aver aIl prior unregistered and aIl subsequent interests, whether registered or not. As drafted, Article 28(1) reads as follows:
A registered interest has priority over any other interest subsequently registered and over an unregistered ïnterest. 230
This provision is intended ta regulate the effects of an international interest as against third parties.231 It applies even where the frrst registered interest was acquired with knowledge of other interests.232
The first ta fùe mIe, however, is not absolute, contrary to views of sorne commentators.233 Declared preferred non-consensual rights take priority over prior registered interests. Article 39 stipulates as much.234 However, when combined with other provisions of the Convention/Protocol which make reference to the priority established by Article 28, ambiguities and problems arise. These problems are directly related to the fact that these other provisions of the Convention refer to the priorities established by Article 28, not by those established by the cornbined effect of Article 28 and Article 39. For example, where ownership passes following the exercise of remedies such as sale or taking in payrnent, the Convention provides that ownership passes "free from any other interest over which the chargee's security interest has
priority under the provisions of Article 28."235 Article X of the Protocol, dealing with sale of the aircraft as an interim measure, aiso provides that
"[0 ]wnership [. . .) passing on a sale under the [provision of the
130 Mobile Equipment Conuention, supra note 4, art. 28(1). 231 See Lauzon, supra note 181 at para. 112.
231 See Mobile Equipment Convention, supra note 4 t art. 28(2). 233 E.g., Lauzon, supra note 181 at para. 113. In aIl due fairness, the rule is absolute as regards the effects of an international interest as against the holders of aIl registered interests. 234 In relevant part. Article 39 provides that non-consensual rights or interests the abject of declarations thereunder ··shaH have prionty over a registered international interest, whether in or outside the insolvency of the debtor." See Mobile Equipment • Convention, supra note 4, art. 39( 1). - 92-
Convention dealing with interim relief] is freefrorn any other interest ouer which the creditor's intemational interest has priority under the provisions
• ofArticle 28 ofthe Convention. "236
As drafted, it would appear that if a secured creditor sells an aircraft subject to seizure and detention in the context of exercising its remedies under the Convention, the buyer would acquire its title free and clear of the seizure and detention and the rights conferred upon the seizing CM thereby. A similar result would occur where the sale is undertaken as an interim measure.
Such problems may be obviated in one of two fashions. AlI treaty provisions making reference to the priority established by Article 28 may he modified ta refer ta both Articles 28 and 39. A simpler solution, however would he to incarporate Article 39 inta Article 28 by reference, the whole as follows:
Subject to Article 39, a registered interest has priority over any ather interest subsequently registered and over an unregistered înterest.
Given that non-consensual interests having been the object of declarations under Article 39 of the Convention take priarity over registered interests, it would be prudent to make specifie reference to such interests in the central provision of the treaty dealing with priorities.
Furthermore, in the context of the sale of an object subject to bath consensual and non-consensual interests, the rights of Canada's designated airpart autharities are not adequately considered. Paragraph three of Article 28 deals \\'ith priarity issues in the context of the conveyance of an object and codifies in part the civil law notion of droit de suite, that is that a duly registered international interest follows the • 235 Ibid., art. B(5}. - 93-
asset through the chain of title. Thus, according to Article 28(3) of the draft, a subsequent purchaser ofan abject acquires its interest subject ta • interests registered at the time of acquisition, but free from unregistered interests. Article 28(3) does not treat, however, the interplay of the rights of a purchaser with non-registerable non-consensual rights of. for example, an airport authority.
A situation may be envisioned where an aircraft seized and detained by a Canadian airport authority is sold while under such seizure and detention. The new purchaser, perhaps unaware of the seizure and detention that had recently been practised, attempts ta quash the seizure, alleging, among other things, that Article 28(3) of the treaty specifically provides that a purchaser acquires its interest in an object subject only ta a registered interest. Given that the rights of declared categories of secured creditors are not registerable under Article 39, they lose their priority.
Article 28(3) was nat specifically required as it codifies a mIe which may be implied from ather provisions of the Convention or from general
principles of law. Even 50, in the interests of certainty and clarity, we are not opposed thereto. [n the same spirit though, the framers of the Convention should require that the same certainty provided to secured creditors be provided to non-consensual rights holders. The priority between consensual and non-consensual rights and interests should be expressly treated in the context of the sale of an abject. The text of paragraph three of Article 28 might therefore be amended to read as follows:
• :236 Aircraft Protocol, supra note S, art. X(4). - 94-
The buyer ofan abject acquires its interest in it:
(a) subject ta applicable non-consensual rights and interests and an • interest registered at the time of its acquisition of that interest; and
(b) free from an unregistered interest even if it has actual knowledge of such an interest.
F. Article 29 of the Convention aDd Article XI of the Aireraft Protocol - EfTects ofInsolvency aDd Remedies
The ability of a secured crediter to effectively and promptly exercise its remedies in the context of bankruptcy or insolvency proceedings is a fundamental and necessary element of an effective treaty regime on security interests in mobile equipment. Once again, however, the clarity afforded consensual secured creditors by the treaty is net afforded te non-consensual creditors. Whereas it is specifically provided at Article 29 that international interests are effective in insolvency proceedings if registered prior ta the commencement thereof, no mention is made of non-consensual rights.
Under Canadian la~N, selZUres and detentions effected by designated airport authorities are valid and opposable as against trustees in bankruptcy.237 As drafted, the treaty may serve to change this jurisprudential result, as it gives overture to the argument that Article 29 specifically codifies the priorities applicable in the insolvency context. Given that it does not mention non-consensual rights, they have no priority in bankruptcy. Although not necessarily convincing on its face, the treaty should not give rise ta opportunities to circumvent protections afforded ta Canada's airports under domestic la\v.
Ta remedy the situation and place bath categories of creditors on equal footing, the text of Article 29(2) could be amended to read as follows: • .237 For a discussion of this issue, see Section V above. - 95-
(2) Nothing in this A.--tiele Convention impairs the effectiveness of an international interest, a non-consensual right or interest or a national interest in t:fte insolvency proceedings where ~ those interest~ • effective under applicable law. In this way, greater certainty is provided to Canadian airports without compromising in any way the interests underlying the treaty.
The Protocol provides for additional remedies on insolvency. One of two alternative sets of remedies may be adopted by a contracting state, or neither.238 If either is selected, an impact on non-consensual rights may he discerned. Alternative A provides that a secured creditor is to he given possession of the aireraft of its insolvent debtor within a determined period of time following the commencement of insolvency proceedings or a moratorium on the exercise of a creditor's rights to institute insolvency proceedings or ta exercise its rights under the Convention, if the debtor's defaults have not been cured.239 The relevant authorities would also be compelled ta assist in the de-registration and export of the aircraft.240 Similarly, Alternative B, although less explicit, would force the debtor or insolvency administrator to either cure all defaults towards the creditor or allow the creditor to take possession of
the aireraft.241
G. Chapter XII or the Convention 85 Chapter IV or the Aireraft Protoeol - Jurisdietion
The jurisdictional rules of the Convention/Aireraft Protocol set out which courts may settle disputes arising under the instruments concerning the subject matter thereof. The general rule adapted by the drafters is that the courts of a cantracting state having jurisdiction under the law of that state may exercise jurisdiction in respect of any elaim
238 Aireraft Protocol, supra note 5. arts IX(l) & XXVlII(3). 239 See Lauzon, supra note 181 at para. 119. 240 See ibid. • 141 See ibid. - 96-
brought under the Convention.242 Nevertheless, special jurisdictional rules exist for the interirn relief remedies of the Convention as weIl as • 243 regarding aircraft objects in particular. For claims involving interim relief under Article 12 of the Convention, only the courts of a contracting state on whose territory the abject is situated may exercise jurisdietion to grant relief, unless the relief sought ineludes the lease, management or sale of the object, in which case the state in which the debtor is situated
may grant relief. 244 Moreover, for claims involving aireraft 0 bjects the state of registry of the aireraft shall be an additional forum to those previously mentioned.245
The application of the jurisdictional prOVISIons of the Convention/Protocol could result in a foreign state, either the state of the debtor or nationality of the aireraft, having jurisdiction to treat matters that would impact on a seizure and detention undertaken by an airport authority in Canada. For example, it would appear that a creditor could obtain a court order authorising the sale of an aireraft subject to seizure and detention in Canada from a court of the debtor's domicile or from a court of the state of registry of the aireraft. The exercise of such an interim remedy by a ereditor, however, is incompatible with the seizure and detention of the aircraft by a Canadian airport, to the extent, of course, that possession would be transferred to the purchaser by the sale. This gives rise to the possibility of conflicting judgments, with the courts of one state authorising and ordering the sale of the aircraft, while Canadian courts had authorised and ordered the seizure and detention of same by a designated airport authority. It aIso engenders sorne doubt on the resulting consequences of the whole.
.242 See Mobile Equipment Convention, supra note 4, art. 42. 243 See Aircraft Protocol, supra note S, art. XX. 244 See Mobile Equipment Convention, supra note 4, art. 42. • 245 See Aircraft Protocol, supra note S, art. XX. - 97-
For obvious reasons, only Canadian courts should have • jurisdiction ta grant or quash, whether directly or indirectly, a seizure and detention undertaken in Canada pursuant to the Airport Transfer Act. Ta avoid the possibility of conflicting judgments, the Government of Canada should to seek greater clarity in this regard. We therefore propose that an additional jurisdictional clause be added ta the Convention specifying that:
Notwithstanding anything in the Convention or Protocol, the courts of a Contracting State having made a declaration under Articles 38 or 39 shall have exclusive jurisdiction in respect of any matter concerning a non-consensual right or interest which forms the abject of a declaration under Article 38 or 39 by that State.
H. Article 5S of the Convention - Transitional Provisions
Transitional provisions of international agreements are designed ta ensure the orderly entry into force of an agreement and to provide for the impact thereof on pre-existing rights. Partieular attention must therefore be directed to these provisions with a view ta ensuring that pre-existing rights are not compromised thereby.
The staggered entry into force of the Convention/Protocol may compromise the effectiveness of a declaration made under Article 39 vis à-vis international interests registered prior to the declaration. Take, for example, the following hypothetical illustration: On January l, 2002, the Convention/Protocol enters into force for major aviation states A, B and C. Over the next fe\\" years, financing transaction are concluded under the treaty regime and international interests in aireraft are registered thereunder. Canada, however, only subsequently signs and becomes bound by the treaty, say in 2010, at which time it immediately makes a declaration under Article 39 in favour of its designated airport • authorities. A Canadian airport authority then seizes and detains an - 98-
aircraft forming the object of an international interest registered in favour • of a secured fmancier of State A prior to Canada's declaration. Article 39(3) of the Convention would appear to establish the priority of the registered international interest over the subsequent seizure and detention undertaken by the Canadian airport in the above fictitious scenario. Given, however, that the right or interest arose under Canada's law before the entry into force of the treaty for Canada, it would be qualified as a "pre-existing right or interest," to be dealt with in accordance with the treaty's transitional provisions.
Article 55 proposes two alternatives: Alternative A stipulates that the Convention does not apply to pre-existing rights or interests, which retain the priority they enjoyed before the entry into force of the Convention.246 Such an approach protects the pre-existing rights enjoyed by seizing airport authorities. The effect of Alternative B, however, is not readily apparent.
Whatever option is adopted, it must be clear that a declaration made by a contracting state under Article 39 serves to trump international interests constituted prior to the entry into force of the treaty for the declaring state. The only registered interest that may trump a non-consensual interest declared under Article 39 is one that is registered after the entry into force of the regime for the declaring state, but prior ta the declaration itselL Such an approach is in line with the rationale underlying Article 39 of the Convention.
• 246 Mobile Equipment Convention, supra note 4, art. 55. - 99-
VIII. CODcluding Remarks
• Over the last deeade, important pragress has been made towards eventually harmonising and mademising in many ways the international regime goveming seeurity interests in high-value mobile equipment sueh as aireraft. In its current form, the Aireraft Equipment Convention makes great strides tawards providing transactianal parties with a more effective regime within which asset-based fmancing of aircraft equipment may be undertaken. With the reduced risk to financiers that the Convention is designed ta achieve will come lower financing eosts, to the benefit of airlines, aircraft manufacturers and the travelling public.
Nevertheless, in its eurrent form and depending on the manner in which it is implemented in Canada, the Aireraft Equipment Convention may compromise the rights conferred upon Canadian Airport Authorities ta seize and detain aircraft for unpaid airport charges. Under Canadian domestic law, this right constitutes a preferred non-consensual right or security interest that takes priority over all eompeting rights and interests in the aircraft subject to seizure and detention, whether in or outside the insolvency context. The entry into force of the Aircraft Equipment Convention will bring into play mIes which do not adequately reflect the sometimes divergent interests between transactional parties in aviation finance and certain preferred creditors with non-cansensual security rights in aireraft. As a result, adapted positions and approaches at the international Level, as well as textual ambiguities of the Aireraft Equipment Convention, may give rise to unintended autcomes prejudicial to the rights of Canadian airports.
The international community lS faced today with a unique opportunity to capitalise on over ten years of effort and bring into force a new treaty regime designed ta meet the needs of the airline industry and • participants therein. The challenge is ta do sa without compromising - 100-
ather Canadian legitimate policy objectives, including ensuring the • viability of Canada's National Airport System247 and the ability of its designated airport authorities to effectively collect user fees.
147 This objective arguably forms the very foundation of the National Airports • Poliey and is specifically mentioned therein. See National Airports Policy, supra note 13. • BIBLIOGRAPHY 1. Primary Sources
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•